<PAGE>
                                                                    EXHIBIT 13.1







CNA FINANCIAL
CORPORATION

ANNUAL REPORT

DECEMBER 31, 2001


<PAGE>

CNA - WHO WE ARE

CNA Financial Corporation is a holding company for property-casualty and life
insurance companies and other related businesses. The CNA insurance group of
companies is one of the largest writers of commercial property-casualty
insurance in the United States - using underwriting to help businesses manage
their risks.

CNA is the country's fourth largest commercial insurance writer, the ninth
largest property-casualty company and the 40th largest life insurance company.

CNA's insurance products include standard commercial lines, specialty lines,
surety, reinsurance, marine and other property and casualty coverages; life and
accident insurance; group long term care, disability and life insurance; and
pension products. CNA services include risk management, information services,
underwriting, loss control and claims administration. Its products and services
are marketed through agents, brokers and managing general agents.

"CNA" is a registered service mark, trade name and domain name of CNA Financial
Corporation authorized for use by its subsidiaries.

CNA's major subsidiaries include The Continental Insurance Company, incorporated
in 1853, Continental Casualty Company incorporated in 1897, and Continental
Assurance Company, incorporated in 1911. The Company operates in all 50 states,
as well as major international markets around the world.

CNA's financial strength is reflected in revenues of $13.2 billion in 2001,
assets of $66.0 billion and stockholders' equity of $8.4 billion at year-end
2001. CNA Financial Corporation stock is traded primarily on the New York Stock
Exchange, and is approximately 89 percent owned by Loews Corporation.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                     PAGE NO.
<S>                                                                                                  <C>
FINANCIAL HIGHLIGHTS
     AS OF AND FOR THE FIVE YEARS ENDED DECEMBER 31, 2001........................................       1

LETTER TO SHAREHOLDERS...........................................................................       2

MANAGEMENT'S DISCUSSION AND ANALYSIS.............................................................       6

CONSOLIDATED FINANCIAL STATEMENTS:

   CONSOLIDATED BALANCE SHEETS
     DECEMBER 31, 2001 AND 2000..................................................................      57

   CONSOLIDATED STATEMENTS OF OPERATIONS
     FOR THE THREE YEARS ENDED DECEMBER 31, 2001.................................................      59

   CONSOLIDATED STATEMENTS OF CASH FLOWS
     FOR THE THREE YEARS ENDED DECEMBER 31, 2001.................................................      60

   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
     AS OF AND FOR THE THREE YEARS ENDED DECEMBER 31, 2001.......................................      62

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS...................................................      63
</TABLE>




<PAGE>

FINANCIAL HIGHLIGHTS


SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
As of and for the Years Ended
December 31                              2001            2000             1999            1998           1997
                                    --------------  --------------    -------------   -------------  -------------
(In millions, except per share data
  and ratios)
<S>                                 <C>             <C>               <C>             <C>            <C>
RESULTS OF OPERATIONS

Revenues                               $ 13,203        $ 15,527         $ 16,381         $ 17,162       $  17,199
                                    ==============  ==============    =============   =============  =============

(Loss) income before cumulative
  effects of changes in accounting
  principles                           $ (1,583)       $  1,214         $     47         $    282       $     966
Cumulative effects of changes in
  accounting principles, net of tax         (61)              -             (177)               -               -
                                    --------------  --------------    -------------   -------------  -------------

  NET (LOSS) INCOME                    $ (1,644)       $  1,214         $   (130)        $    282       $     966
                                    ==============  ==============    =============   =============  =============

(LOSS) EARNINGS PER SHARE
(Loss) income before cumulative
  effects of changes in accounting
  principles                           $  (8.16)       $   6.61         $   0.19         $   1.49       $    5.17
Cumulative effects of changes in
  accounting principles, net of tax       (0.32)              -            (0.96)               -               -
                                    --------------  --------------    -------------   -------------  -------------

  NET (LOSS) INCOME                    $  (8.48)       $   6.61         $  (0.77)        $   1.49       $    5.17
                                    ==============  ==============    =============   =============  =============

FINANCIAL CONDITION

Invested assets                        $ 35,826        $ 36,059         $ 36,935         $ 38,828       $  38,644
Total assets                             65,968          63,032           62,605           64,102          64,116
Insurance reserves                       43,623          39,054           39,271           40,509          39,829
Debt                                      2,567           2,729            2,881            3,160           2,897
Stockholders' equity                      8,367           9,647            8,938            9,157           8,309

Book value per share                   $  37.42        $  52.64         $  47.66         $  47.89       $   44.01
Return on average stockholders'
  equity                                  -18.3%           13.1%            -1.4%             3.2%           12.6%

STATUTORY SURPLUS

Property-casualty companies*           $  6,225        $  8,373         $  8,679         $  7,593        $  7,123
Life insurance companies                  1,752           1,274            1,222            1,109           1,224

OTHER FINANCIAL DATA

Net operating (loss) income            $ (2,401)       $    544         $    (69)        $    (47)      $     517
Realized investment gains, net of
  tax and minority interest                 818             670              116              329             449
Cumulative effects of changes in
  accounting principles, net of tax         (61)              -             (177)               -               -
                                    --------------  --------------    -------------   -------------  -------------

NET (LOSS) INCOME                      $ (1,644)       $  1,214         $   (130)        $    282       $     966
                                    ==============  ==============    =============   =============  =============
</TABLE>

* Surplus includes the property-casualty companies' equity ownership of the life
insurance subsidiaries.



                                       1
<PAGE>

LETTER TO SHAREHOLDERS

Dear Shareholder:

CNA was tested in 2001.

For the last three years we have focused our efforts on underwriting excellence
-- developing superior ability to identify, analyze and react to our customers'
changing risks.

Our difficult financial results arose mainly from increased estimates of prior
years' claims and underscore the fact that insurance is an intrinsically
volatile business. But we also believe there is great opportunity for companies
with a clear commitment to underwriting excellence.

While hard hit in 2001, we continued to reinforce our underwriting discipline,
cull unprofitable accounts, exit non-strategic businesses and invest in talent
and resources to support great underwriting. These efforts are increasingly
evident in the underlying performance of our businesses.

Despite unfavorable results and thanks to shareholder support, the efforts of
our employees and the loyalty of our distribution partners, we continued to move
ahead on a multi-year effort to improve operating performance and build
shareholder value. In 2002, CNA is well positioned to rebound.

MAJOR EVENTS

2001 will be remembered as an incredibly difficult year for the insurance
industry and for CNA. A new wave of asbestos claims, escalating losses on
prior-year business and the need for streamlined operating platforms all
required tough decisions. Then came the catastrophic event of September 11.

RESERVE STRENGTHENING  In the second quarter, new data and analysis showed that
claims on CNA policies written in prior years were coming in higher than
expected.

-    Asbestos  The inflow of asbestos claims has not abated, even after the
     bankruptcies of the major asbestos manufacturers. This changed our
     expectations about future claims costs, which were the chief driver of a
     reserve increase that resulted in an after-tax charge of approximately $800
     million.

-    Reinsurance  Data on emerging claims indicate that treaties written in
     earlier years were much less profitable than expected. We used this
     information to assess and streamline the entire reinsurance operation
     stopped writing new business from London. We consolidated the business onto
     our U.S. operating platform and stopped writing new business from London.
     For the full year, increased reserves, plus the anticipated costs of
     selling CNA Re U.K., resulted in an after-tax charge of $669 million.

-    Other Lines  Actuarial studies of medical malpractice, general liability
     and other lines also indicated unfavorable claim trends on prior-year
     business. Increased reserves resulted in an after-tax charge of $954
     million.

Reflecting these actions, CNA raised an additional $1 billion of capital through
a common stock rights offering to existing shareholders, which partially offset
the impact of the reserve increases.

In addition, the reserve actions led the rating agencies to review our financial
strength ratings. A.M. Best affirmed the A ratings of CNA's primary
property-casualty and life pools. Standard & Poor's, Moody's and Fitch lowered
the rating of our primary property-casualty pool by


                                       2
<PAGE>
LETTER TO SHAREHOLDERS

one notch but these ratings are still within the A rating categories. On a
brighter note, these agencies changed the outlook on our ratings to stable from
negative, following their review of all the material events of 2001.

WORLD TRADE CENTER  Industry losses from the September 11 event are estimated
to be in the range of $50 billion. As a major commercial insurer, CNA incurred
claims in all our businesses. However, reinsurance protection from highly rated
reinsurers held CNA's after-tax loss to $304 million.

RESTRUCTURING  In the fourth quarter, CNA announced a company wide restructuring
plan designed to simplify the organization and improve underwriting and
claims-handling. Approximately 1,850 positions - 10 percent of the workforce
were eliminated, and nearly 170 offices are being consolidated into
approximately 70. While significant future expense savings are expected, these
changes impacted everyone at CNA personally. This company wide initiative, plus
second quarter changes in our information technology organization, resulted in
after-tax restructuring and related charges of $165 million.

Having weathered the storm in 2001, CNA is able to move forward in one of the
most favorable markets in many years. We are also carried forward by steady
improvement in the underlying performance of our businesses.

UNDERLYING PERFORMANCE

Beneath the surface of our reported results, the impact of our multi-year
turnaround effort is becoming increasingly evident in our business fundamentals.

-    PROPERTY & CASUALTY OPERATIONS  Rate increases have accelerated,
     re-underwriting actions have culled the book of unprofitable accounts, and
     new business is returning to healthy levels at the right price. While the
     accident year loss ratio is not yet where it needs to be, this key ratio
     improved 10 points to 76% in 2001 in our Standard Lines business, excluding
     the major issues previously discussed.

-    LIFE & GROUP OPERATIONS  Group Operations had its best sales year ever for
     continuing businesses. Excluding the impact of the major events, Life &
     Group contributed operating earnings of $191 million in 2001.

-    CNA RE  Results in this business also show important improvement aside from
     the major events. The 2001 accident year loss ratio was 64%, down
     dramatically from the prior year. Focusing on the U.S. operating platform
     has improved underwriting control and service at reduced cost.

In addition to business-specific progress, one of CNA's most important
competitive advantages is the broad range of our products, services and
expertise. Following the company wide organizational changes in the fourth
quarter, we are now structured to present "a single CNA face" to our customers
and business partners. This change provides much easier access to all our
capabilities in both the Property & Casualty and Life & Group Operations.








                                       3
<PAGE>
LETTER TO SHAREHOLDERS

2002 OUTLOOK

CNA has seldom been as well positioned from the standpoint of talent, financial
strength and favorable market conditions. Our restructuring and turnaround
activities are largely behind us. To deliver in 2002, CNA is focused on three
operational commitments.

1.   Property & Casualty Operations and CNA Re are committed to building
     profitable, properly balanced risk portfolios. It is critical for our
     portfolios to grow in both size and profitability in order to withstand the
     next inevitable downturn in market conditions.

2.   Life & Group Operations are in the early implementation stages of a
     strategy to focus on product areas with the greatest potential for
     long-term growth. Our commitment here is to implement strategically while
     continuing to produce strong operating earnings.

3.   Finally, we intend to capitalize on CNA's broad base of products to grow
     the business, especially with existing customers and distribution partners.
     This source of growth is the most enduring, because it strengthens our
     relationships with customers, agents and brokers.

In charting this course, we are mindful of the changing landscape of risk. The
underlying improvement in our property - casualty businesses has been
accomplished in a favorable market environment. Just how long the window stays
open, however, depends on a series of factors.

-    Reinsurance costs   With these costs increasing dramatically, primary
     insurers, including CNA, are retaining more risk than last year.

-    Enron   In the post-Enron environment, our insureds have increased
     vulnerability to claims related to accounting and financial reporting.

-    Investment returns   Reduced yields put more pressure on underwriting
     results to maintain and improve returns.

-    Terrorism   The need for federal backstop legislation for terrorism
     coverage is a major unresolved issue at this time. CNA continues to work
     with the insurance industry and Congress to secure a meaningful solution.
     Meanwhile, we are carefully monitoring our exposure, while insureds often
     go unprotected.

These factors suggest that the strong pricing environment will need to continue
beyond 2002 for the industry to regain strength and stability. They also
underscore the need for vigilance for undue concentrations of risk. Finally, the
complex risks facing our customers suggest that CNA has abundant opportunities
for profitable growth as we remain focused on disciplined underwriting.

MANAGEMENT CHANGES

During early 2001, we were fortunate to attract Bob Patin to lead our Life &
Group Operations after a distinguished career in the business. In turn, Bob has
augmented a strong talent base, so that today we have an energetic team focused
on building the business.


                                       4
<PAGE>
LETTER TO SHAREHOLDERS

We were equally fortunate to attract Steve Lilienthal to lead Property &
Casualty Operations in July 2001. Steve has a superb track record of leading and
accelerating change at several insurance organizations. Steve has also augmented
the talent base. In very short order, his team restructured the organization to
position us well for 2002.

Earlier this year, Debra McClenahan was promoted to lead CNA Re after nine years
of service to CNA Re, most recently as Chief Operating Officer.

In summary, CNA was tested as never before in 2001. But we held firm to a
direction that we believe will provide ample rewards for our shareholders,
distribution partners and employees.

I deeply appreciate everyone who rallied behind CNA in 2001. The pieces are now
in place for CNA to build shareholder value. In 2002, it's time for us to
deliver.


Sincerely,

Bernard L. Hengesbaugh
Chairman and Chief Executive Officer
CNA insurance companies
March 8, 2002










                                       5
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

CONSOLIDATED OPERATIONS

The following discussion highlights significant factors influencing the
consolidated operations and financial condition of CNA Financial Corporation
(CNAF) and its controlled subsidiaries (collectively CNA or the Company). CNA is
one of the largest insurance organizations in the United States and based on
2000 net written premiums, is the ninth largest property-casualty company and
the 40th largest life insurance company.

Loews Corporation (Loews) owned approximately 89% of the outstanding common
stock of CNAF as of December 31, 2001. The following discussion should be read
in conjunction with the Consolidated Financial Statements and related Notes
found on pages 57 to 120, and the five-year summary of selected financial data
appearing on page 1.

CNA underwent significant management changes, strategic realignment and
restructuring in the second half of 2001. These management changes, as well as
the strategic realignment and restructuring, have changed the way CNA manages
its operations and makes business decisions and, therefore, necessitated a
change in the Company's reportable segments.

The changes made to the Company's reportable segments were as follows: 1)
Commercial Insurance and CNA Excess & Select (formerly included in Agency Market
Operations) and Risk Management Operations were combined into Standard Lines; 2)
CNA Pro, CNA HealthPro and CNA Guaranty and Credit (formerly included in
Specialty Operations) and Global Operations were combined into Specialty Lines;
3) losses and expenses related to the centralized adjusting and settlement of
environmental pollution and other mass tort and asbestos (APMT) claims
previously included in Commercial Insurance, CNA Excess & Select, Risk
Management and Global Operations are now included in the Corporate and Other
segment; and 4) Personal Insurance, CNA Unisource, agriculture insurance,
entertainment insurance and other financial lines were moved from the various
property-casualty segments to the Corporate and Other segment. CNA Re, Group
Operations and Life Operations are unchanged from the prior segment
presentation.

Segment disclosures of prior periods have been modified to conform to the
current year presentation.

CNA now conducts its operations through five operating segments: Standard Lines,
Specialty Lines and CNA Re (which comprise the property-casualty segments),
Group Operations and Life Operations. In addition to these five operating
segments, certain other activities are reported in the Corporate and Other
segment. These segments reflect the way CNA manages its operations and makes
business decisions.



                                       6
<PAGE>

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the amounts
of revenues and expenses reported during the period. Actual results may differ
from those estimates.

The following discussion of operating results focuses on "net operating income
(loss)" or "net operating results." Net operating income is calculated by
deducting net realized investment gains or losses (investment gains or losses
after deduction of related income taxes and minority interests) and any
cumulative effect of a change in accounting principle, net of tax and minority
interest, from net results. Net operating income, as defined above, is used in
management's discussion of the results of operations because net realized
investment gains or losses related to the Company's available-for-sale
investment portfolio are largely discretionary, are generally driven by economic
factors that are not necessarily consistent with key drivers of underwriting
performance and, therefore, are not an indication of trends in operations.

OPERATING RESULTS

The following table summarizes key components of operating results for the years
ended December 31, 2001, 2000 and 1999.

CONSOLIDATED OPERATIONS

<TABLE>
<CAPTION>
Years ended December 31                                                     2001           2000           1999
                                                                        -------------  -------------  ------------
(In millions, except per share data)
<S>                                                                     <C>            <C>            <C>
Operating revenues:
  Net earned premiums                                                   $     9,365    $    11,474    $   13,282
  Net investment income                                                       1,897          2,286         2,194
  Other revenues                                                                676            739           705
                                                                        -------------  -------------  ------------

Total operating revenues                                                     11,938         14,499        16,181

Claims, benefits and expenses                                                15,257         13,717        16,309
Restructuring and other related charges                                         251              -            83
                                                                        -------------  -------------  ------------

Operating (loss) income before tax and minority interest                     (3,570)           782          (211)

Income tax benefit (expense)                                                  1,190           (210)          172
Minority interest                                                               (21)           (28)          (30)
                                                                        -------------  -------------  ------------

Net operating (loss) income                                                  (2,401)           544           (69)

Net realized investment gains, net of tax and minority
  interest                                                                      818            670           116
Cumulative effects of changes in accounting principles,
  net of tax                                                                    (61)             -          (177)
                                                                        -------------  -------------  ------------

NET (LOSS) INCOME                                                       $    (1,644)   $     1,214    $     (130)
                                                                        =============  =============  ============

Basic and diluted (loss) earnings per share:

  Net operating (loss) income                                           $    (12.38)   $      2.96    $    (0.44)
  Net realized investment gains, net of tax and minority
    interest                                                                   4.22           3.65          0.63
  Cumulative effects of changes in accounting
    principles, net of tax                                                    (0.32)             -         (0.96)
                                                                        -------------  -------------  ------------
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE AVAILABLE TO
  COMMON STOCKHOLDERS                                                   $     (8.48)   $      6.61    $    (0.77)
                                                                        =============  =============  ============

WEIGHTED AVERAGE OUTSTANDING COMMON STOCK AND COMMON
  STOCK EQUIVALENTS                                                           194.0          183.6         184.2
                                                                        ============    ============   ===========
</TABLE>


                                       7
<PAGE>


The following table summarizes net operating (loss) income by segment for the
years ended December 31, 2001, 2000 and 1999.

NET OPERATING (LOSS) INCOME BY SEGMENT

<TABLE>
<CAPTION>
Years ended December 31                                                 2001                  2000                1999
                                                                  ------------------     ---------------    ------------------
(In millions)
<S>                                                               <C>                    <C>                <C>
Standard Lines                                                       $         (452)        $       202         $          36
Specialty Lines                                                                (328)                199                   101
CNA Re                                                                         (666)                 74                    (7)
Group Operations                                                                 13                  50                    (1)
Life Operations                                                                  66                 181                   148
Corporate and Other                                                          (1,034)               (162)                 (346)
                                                                  ------------------     ---------------    ------------------

NET OPERATING (LOSS) INCOME                                          $       (2,401)        $       544         $         (69)
                                                                  ==================     ===============    ==================
</TABLE>


2001 COMPARED WITH 2000

Net earned premiums decreased $2,109 million in 2001 as compared with 2000
primarily as a result of increased ceded premiums related to corporate aggregate
reinsurance treaties and a change in estimate for retrospective premium accruals
recorded during 2001. Net earned premiums declined in CNA Re primarily as a
result of the proposed sale of CNA Re's United Kingdom subsidiaries. In
addition, net earned premiums declined in Group Operations, related primarily to
the sale of Life Reinsurance, CNA's individual life reinsurance business, which
was sold via an indemnity reinsurance agreement on December 31, 2000. See Note P
to the Consolidated Financial Statements for a discussion of these transactions.

The net loss in 2001 was $1,644 million, or a loss of $8.48 per share, as
compared with net income for 2000 of $1,214 million, or $6.61 per share.
Included in the net loss for 2001 was a charge of $61 million, net of tax, for
the cumulative effect of a change in accounting principle for derivative
financial instruments. Net realized investment gains increased $148 million in
2001 as compared with 2000 attributable primarily to sales of fixed maturity
securities.

The net operating loss was $2,401 million, or a loss of $12.38 per share, in
2001 as compared with net operating income of $544 million, or $2.96 per share,
in 2000. The decline in net operating results was due principally to prior year
reserve strengthening of $2.1 billion after-tax recorded in the second quarter
of 2001 related to a change in estimate of prior year net loss reserves and
retrospective premium accruals; estimated losses related to the September 11,
2001 World Trade Center disaster and related events (WTC event) of $304 million
after-tax, net of the related corporate aggregate reinsurance treaties benefit,
recorded in the third quarter of 2001; and restructuring and other related
charges of $165 million after-tax. The 2001 net operating loss also includes a
$160 million after-tax charge primarily to strengthen prior underwriting year
loss reserves of the London-based reinsurance operation, CNA Reinsurance Company
Limited (CNA Re U.K.) and a $69 million after-tax charge for reserve
strengthening primarily for the current accident year in the London-based
primary commercial and marine operations, both recorded in the fourth quarter of
2001. Net operating income also decreased $52 million after-tax from losses
related to the recent bankruptcy filing by certain Enron entities and $159
million after-tax due to a decline in limited partnership income. These declines
were partially offset by lower prior year adverse loss reserve development
(excluding the second quarter 2001 reserve strengthening) and a $61 million
after-tax benefit related to corporate aggregate reinsurance treaties for core
operations.

The 2001 net operating loss includes the following, which are described in more
detail on the following pages.


                                       8
<PAGE>

-    The Company recorded an after-tax charge of $2.1 billion ($3.2 billion
     pretax) in the second quarter of 2001, related to a change in estimate of
     prior year net loss reserves and retrospective premium accruals. This
     amount includes the impact of net reserve strengthening, the related
     increase in the accrual for insurance-related assessments and the ceded
     premiums and interest charges related to the corporate aggregate
     reinsurance treaty that attached due to the reserve strengthening. Further
     details related to the reserve strengthening are discussed below as well as
     in the individual segment discussions of operations.

-    In the third quarter of 2001, the Company recorded the estimated impact of
     the WTC event, which resulted in $1,648 million of pretax gross losses, and
     $468 million pretax net of reinsurance, net of the related corporate
     aggregate reinsurance treaties benefit. The after-tax estimated impact was
     $304 million, net of the related corporate aggregate reinsurance treaties
     benefit. Further details of the WTC event are provided below as well as in
     the individual segment discussions of operations.

-    In 2001, the Company recorded ceded premiums, ceded losses and interest
     charges related to corporate aggregate reinsurance treaties in place for
     the 1999 through 2001 accident years. The discussion in the Corporate
     Aggregate Reinsurance Treaties section below includes all premiums, losses
     and interest charges related to these treaties. However, in all other
     sections of the Management's Discussion and Analysis the applicable amounts
     ceded to these treaties as a result of the second quarter 2001 reserve
     strengthening and the WTC event are included in the quantification of those
     significant items. The ceded premiums, ceded losses and interest charges
     related to the aggregate reinsurance treaties not related to those
     significant events is described as "Core."

-    During 2001, the Company recorded after-tax restructuring and other related
     charges of $165 million related to workforce reductions and asset
     write-offs resulting from changes in the Company's organization, which are
     discussed in more detail below.

Based upon the significance of the second quarter 2001 reserve strengthening,
the WTC event, corporate aggregate reinsurance treaties and restructuring and
other related charges, the underwriting impact of these items is discussed in
the aggregate in the following sections. When the Company discusses its
underwriting results and ratios for its property-casualty segments, the
discussion will compare underwriting results and ratios excluding the effect of
these significant items. The following table provides the details by segment of
underwriting results as reported and adjusted.

UNDERWRITING RESULTS BY SEGMENT

<TABLE>
<CAPTION>
                                                                                                      PROPERTY-
                                                                STANDARD    SPECIALTY                 CASUALTY
Year ended December 31, 2001                                     LINES        LINES       CNA RE      SEGMENTS
                                                              ------------ ------------ ------------ -----------
(In millions)
<S>                                                           <C>           <C>         <C>          <C>
Underwriting loss, as reported                                 $(1,257)     $  (748)     $(1,117)     $(3,122)
Underwriting impact of second quarter 2001 reserve
  strengthening net of the benefit of the corporate
  aggregate reinsurance treaty                                     911          410          587        1,908
Underwriting impact of the WTC event net of the benefit of
  the related corporate aggregate reinsurance treaties              68           18          263          349
Underwriting benefit from Core corporate aggregate
  reinsurance treaties                                            (101)         (28)          (3)        (132)
Restructuring and other related
  charges                                                           36            9            6           51
                                                               -------      -------      -------      -------

ADJUSTED UNDERWRITING LOSS*                                    $  (343)     $  (339)     $  (264)     $  (946)
                                                               =======      =======      =======      =======
</TABLE>

* The adjusted underwriting loss excludes the impact of the second quarter 2001
reserve strengthening, the WTC event, corporate aggregate reinsurance treaties
and restructuring and other related charges.


                                       9
<PAGE>

2000 COMPARED WITH 1999

Net earned premiums decreased $1,808 million in 2000 as compared with 1999. This
decrease was attributable to $1,354 million related to the CNA Personal
Insurance (Personal Insurance) transaction (see Note P to the Consolidated
Financial Statements for a discussion of the Personal Insurance transaction), as
well as continued efforts to re-underwrite business and obtain adequate rates
for exposures underwritten.

Net income in 2000 was $1,214 million, or $6.61 per share, as compared with a
net loss for 1999 of $130 million, or $0.77 per share. Net realized investment
gains increased $554 million in 2000 attributable primarily to sales of equity
securities. Included in the net loss for 1999 was a charge of $177 million, net
of tax, or $0.96 per share, for the cumulative effect of a change in accounting
principle for insurance-related assessments.

Net operating income was $544 million, or $2.96 per share, in 2000 as compared
with a net operating loss of $69 million, or $0.44 per share, in 1999. Net
operating income increased $613 million in 2000, primarily as a result of the
improvement of $345 million for the property-casualty segments, $51 million for
Group Operations, $33 million for Life Operations and $184 million for Corporate
and Other. The improvement in the property-casualty segments net operating
income was attributable principally to improved underwriting results of $309
million after-tax and increased net investment income including an $87 million
increase in limited partnership income, partially offset by increased expenses.
The improvement in 2000 results was due primarily to significant rate increases
across the entire book of business, favorable catastrophe experience, reduced
prior year reserve strengthening and the absence of $54 million after-tax
restructuring and related charges incurred in 1999. After-tax catastrophe losses
for 2000 improved by $189 million, including $62 million related to Personal
Insurance (see Note P to the Consolidated Financial Statements for a discussion
of the Personal Insurance transaction). In addition, net operating income in
both 2000 and 1999 benefited from a change in estimate for certain
insurance-related assessments resulting from regulatory changes in the basis on
which certain of these assessments are calculated. The after-tax impact of these
changes was $60 million in 2000 and $51 million in 1999.

SECOND QUARTER 2001 PRIOR YEAR RESERVE STRENGTHENING

During the second quarter of 2001, the Company noted the continued emergence of
adverse loss experience across several lines of business related to prior years
that are discussed in further detail below. The Company completed a number of
reserve studies during the second quarter of 2001 for many of its lines of
business, including those in which these adverse trends were noted. With respect
to APMT reserves, the Company reviewed internal claims data as well as studies
generated by external parties, including a significant industry analysis of
asbestos and environmental pollution exposures by an international rating
agency. As a result of these various reviews, management concluded that ultimate
losses, including losses for APMT claims, would be higher in the range of
possible outcomes than previously estimated. The Company recorded $2.6 billion
pretax ($1.7 billion after-tax), net of the related corporate aggregate
reinsurance treaty benefit, to strengthen reserves associated with a change in
estimate of prior year net loss reserves, including $1.2 billion pretax ($0.8
billion after-tax) related to APMT.


                                       10
<PAGE>

The second quarter 2001 reserve strengthening and related items comprising the
amounts noted above are detailed by segment in the following table.

SECOND QUARTER 2001 RESERVE STRENGTHENING

<TABLE>
<CAPTION>
                                                  STANDARD     SPECIALTY                CORPORATE
Year ended December 31, 2001                       LINES         LINES       CNA RE     AND OTHER      TOTAL
                                                 ----------   -----------  ----------  -----------   ---------
(In millions)
<S>                                              <C>          <C>          <C>         <C>           <C>
Net reserve strengthening excluding the impact
of the corporate aggregate reinsurance treaty:
  APMT                                             $    --      $    --     $    57      $ 1,140      $ 1,197
  Non-APMT                                             523          407         574           90        1,594
                                                   -------      -------     -------      -------      -------

Total                                                  523          407         631        1,230        2,791
Pretax benefit from corporate aggregate
  reinsurance treaty on accident year 1999            (197)          --         (26)          --         (223)*
Accrual for insurance-related assessments               48           --          --           --           48
                                                   -------      -------     -------      -------      -------

Net reserve strengthening and related accruals         374          407         605        1,230        2,616
                                                   -------      -------     -------      -------      -------

Change in estimate of premium accruals                 629            3         (13)          (3)         616
Reduction of related commission accruals               (50)          --          --           --          (50)
                                                   -------      -------     -------      -------      -------

Net premium and related accrual reductions             579            3         (13)          (3)         566
                                                   -------      -------     -------      -------      -------

TOTAL PRETAX SECOND QUARTER 2001 RESERVE
  STRENGTHENING AND OTHER RELATED ACCRUALS         $   953      $   410     $   592      $ 1,227      $ 3,182
                                                   =======      =======     =======      =======      =======

TOTAL AFTER-TAX SECOND QUARTER 2001 RESERVE
  STRENGTHENING AND OTHER RELATED ACCRUALS         $   619      $   277     $   384      $   799      $ 2,079
                                                   =======      =======     =======      =======      =======
</TABLE>

* $500 million of ceded losses reduced by $230 million of ceded premiums and $47
million of interest charges.

The non-APMT adverse loss development was the result of recent analyses of
several lines of business. This development related principally to commercial
insurance coverages including automobile liability and multiple-peril, as well
as assumed reinsurance and healthcare-related coverages. A brief summary of
these lines of business and the associated reserve development is discussed
below and in more detail in the discussion of the Company's segments.

Approximately $600 million of the adverse loss development, excluding the impact
of the corporate aggregate reinsurance treaty, is a result of analyses of
several coverages provided to commercial entities written by various segments of
CNA. These analyses showed unexpected increases in the size of claims for
several lines, including commercial automobile liability, general liability and
the liability portion of commercial multiple-peril. In addition, the number of
commercial automobile liability claims was higher than expected. Finally,
several state-specific factors resulted in higher than anticipated losses,
including developments associated with commercial automobile liability coverage
in Ohio and general liability coverage provided to contractors in New York.

An analysis of CNA Re's assumed reinsurance business showed that the paid and
reported losses for recent accident years were higher than expectations and
resulted in an increase of net reserves of approximately $560 million, excluding
the impact of the corporate aggregate reinsurance treaty. The estimated ultimate
loss ratios for these recent accident years have been revised to reflect the
paid and reported losses.

Approximately $320 million of adverse loss development, excluding the impact of
the corporate aggregate reinsurance treaty, occurred in Specialty Lines and was
caused by coverages provided to healthcare-related entities. The level of paid
and reported losses associated with coverages provided to national long-term
care facilities was higher than expected. In addition, the average size of
claims resulting from coverages provided to physicians and institutions
providing healthcare-related services increased more than expected.


                                       11
<PAGE>

Concurrent with the Company's review of loss reserves, the Company completed
comprehensive studies of estimated premium receivable accruals on
retrospectively rated insurance policies and involuntary market facilities. As a
result, the Company recorded a $0.6 billion pretax ($0.4 billion after-tax)
charge related to retrospective premium and other premium accruals (premium
accruals). The studies included the review of all such retrospectively rated
insurance policies and the current estimate of ultimate losses.

As a result of this review and changes in premiums associated with the change in
estimates for loss reserves, the Company recorded a pretax reduction in premium
accruals of $566 million. The effect on net earned premiums was $616 million
offset by a reduction of accrued commissions of $50 million. Approximately $188
million of this amount resulted from a change in estimate in premiums related to
involuntary market facilities, which had an offsetting impact on net losses and
therefore had no impact on the net operating results for the year. Accruals for
ceded premiums related to other reinsurance treaties increased $83 million due
to the reserve strengthening. The remainder of the decrease in premium accruals
relates to the change in estimate of the amount of retrospective premium
receivables as discussed above.

WORLD TRADE CENTER EVENT

During the third quarter of 2001, the Company experienced a severe catastrophe
loss estimated at $468 million pretax, net of reinsurance, related to the WTC
event. The loss estimate is based on a total industry loss of $50 billion and
includes all lines of insurance. The current estimate takes into account CNA's
substantial reinsurance agreements, including its catastrophe reinsurance
program and corporate reinsurance programs. These loss estimates are subject to
considerable uncertainty. Subsequent developments on claims arising out of the
WTC event, as well as the collectibility of reinsurance recoverables, could
result in an increase in the total estimated net loss, which could be material
to the Company's results of operations.

The following table provides management's estimate of losses related to the WTC
event on a gross basis (before reinsurance) and a net basis (after reinsurance)
for the Company's operating segments.

WORLD TRADE CENTER EVENT

<TABLE>
<CAPTION>
                                                                                 PRETAX
                                                                                CORPORATE
                                                                                AGGREGATE          TOTAL             TOTAL
                                                                PRETAX         REINSURANCE         PRETAX          AFTER-TAX
Year ended December 31, 2001               GROSS LOSSES       NET IMPACT*        BENEFIT           IMPACT            IMPACT
(In millions)                            ----------------   ---------------   -------------     ------------     -------------
<S>                                      <C>                <C>               <C>               <C>              <C>
Standard Lines                              $      375        $     185         $     108         $     77         $      50
Specialty Lines                                    214               30                12               18                12
CNA Re                                             662              410               139              271               176
Group Operations                                   322               80                 -               80                52
Life Operations                                     75               22                 -               22                14
                                         ----------------   ---------------   -------------     ------------     -------------

TOTAL                                       $    1,648        $     727         $     259        $     468         $     304
                                         ================   ===============   =============     ============     =============
</TABLE>


* Pretax impact of the WTC event before the corporate aggregate reinsurance
treaties. The net impact includes $85 million of reinstatement and other
additional premiums.

CORPORATE AGGREGATE REINSURANCE TREATIES

In 1999, the Company entered into an aggregate reinsurance treaty related to the
1999 through 2001 accident years covering substantially all of the Company's
property-casualty lines of business (the Aggregate Cover). The Company has two
sections of coverage under the terms of the Aggregate Cover. These coverages
attach at defined loss and allocated loss adjustment expense (collectively,
losses) ratios for each accident year. Coverage under the first section of the
Aggregate Cover, which is available for all accident years covered by the
contract, has


                                       12
<PAGE>

annual limits of $500 million of ceded losses with an aggregate limit of $1
billion of ceded losses for the three year period. The ceded premiums are a
percentage of ceded losses and for each $500 million of limit the ceded premium
is $230 million. The second section of the Aggregate Cover, which is only
available for accident year 2001, provides additional coverage of up to $510
million of ceded losses for a maximum ceded premium of $310 million. Under the
Aggregate Cover, interest charges on the funds withheld accrue at 8% per annum.
If the aggregate loss ratio for the three-year period exceeds certain
thresholds, additional premiums may be payable and the rate at which interest
charges are accrued would increase to 8.25% per annum.

The coverage under the second section of the Aggregate Cover was triggered for
the 2001 accident year. As a result of losses related to the WTC event, the
limit under this section was exhausted. Additionally, as a result of the
significant reserve additions recorded during 2001, the $500 million limit on
the 1999 accident year under the first section was also fully utilized. No
losses have been ceded to the remaining $500 million of limit on accident years
2000 and 2001 under the first section.

In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property-casualty
lines of business in the Continental Casualty Company pool (the CCC Cover). The
loss protection provided by the CCC Cover has an aggregate limit of
approximately $760 million of ceded losses. The CCC Cover provides continuous
coverage in excess of the second section of the Aggregate Cover discussed above.
Under the CCC Cover, interest charges on the funds withheld generally accrue at
8% per annum. The interest rate increases to 10% per annum if the aggregate loss
ratio exceeds certain thresholds.

The impact of the Aggregate and CCC Cover on pretax operating results was as
follows:

IMPACT OF AGGREGATE AND CCC COVER ON PRETAX OPERATING RESULTS

<TABLE>
<CAPTION>
                                                                          AGGREGATE
Year ended December 31, 2001                                                COVER        CCC COVER        TOTAL
                                                                        -------------- --------------- -------------
(In millions)
<S>                                                                     <C>            <C>             <C>
Ceded earned premiums                                                       $   (543)      $    (260)     $   (803)
Ceded  losses                                                                  1,010             470         1,480
Interest charges                                                                 (81)            (20)         (101)
                                                                        -------------- --------------- -------------

PRETAX BENEFIT ON OPERATING RESULTS                                         $    386       $     190      $    576
                                                                        ============== =============== =============
</TABLE>

The pretax benefit from the Aggregate Cover and CCC Cover by operating segment
on estimated losses related to the second quarter 2001 reserve strengthening,
the WTC event and Core operations for 2001 was as follows:

IMPACT OF AGGREGATE AND CCC COVER ON PRETAX OPERATING RESULTS

<TABLE>
<CAPTION>
                                                             SECOND
                                                           QUARTER 2001
                                                             RESERVE                          CORE
Year ended December 31, 2001                              STRENGTHENING         WTC        OPERATIONS      TOTAL
                                                         ---------------  --------------  ------------  ------------
(In millions)
<S>                                                      <C>              <C>             <C>           <C>
Standard Lines                                              $       197     $     108       $     76     $    381
Specialty Lines                                                       -            12             21           33
CNA Re                                                               26           139             (3)         162
                                                         ---------------  --------------  ------------  ------------

PRETAX BENEFIT ON OPERATING RESULTS                         $       223     $     259       $     94     $    576
                                                         ===============  ==============  ============  ============
</TABLE>




                                       13
<PAGE>

2001 RESTRUCTURING

In 2001, the Company finalized and approved two separate restructuring plans.
The first plan, which related to the Company's Information Technology operations
(the IT Plan), was approved in June of 2001. The second plan, which principally
relates to restructuring the property-casualty segments and Life Operations,
discontinuation of variable life and annuity business and consolidation of real
estate locations (the 2001 Plan), was approved in December of 2001.

IT PLAN

The overall goal of the IT Plan was to improve technology for the underwriting
function and throughout the Company and to eliminate inefficiencies in the
deployment of IT resources. The changes facilitate a strong focus on
enterprise-wide system initiatives. The IT Plan had two main components, which
include the reorganization of IT resources into the Technology and Operations
Group with a structure based on centralized, functional roles and the
implementation of an integrated technology roadmap that includes common
architecture and platform standards that directly support the Company's
strategies.

As summarized in the following table, the Company incurred $62 million pretax,
of restructuring and other related charges for the IT Plan. The Company does not
expect to incur significant amounts of additional charges with respect to the IT
Plan in any future period and, as a result, does not intend to separately
classify such expenses as restructuring and other related charges when they
occur.

IT PLAN PRETAX CHARGES BY SEGMENT

<TABLE>
<CAPTION>
                                                           EMPLOYEE
                                                          TERMINATION     IMPAIRED
                                                          AND RELATED       ASSET          OTHER
                                                         BENEFIT COSTS     CHARGES         COSTS           TOTAL
                                                         -------------- -------------- --------------  ---------------
(In millions)
<S>                                                      <C>            <C>            <C>             <C>
Standard Lines                                              $        5    $         1    $         -     $          6
Specialty Lines                                                      2              -              -                2
Life Operations                                                      -             17              -               17
Corporate and Other                                                 22             14              1               37
                                                         -------------- -------------- --------------  ---------------

TOTAL                                                      $        29    $        32    $         1     $         62
                                                         ============== ============== ==============  ===============
</TABLE>

In connection with the IT Plan, after the write-off of impaired assets, the
Company accrued $30 million of restructuring and other related charges (the IT
Plan Initial Accrual). These charges primarily related to $29 million for
workforce reductions of approximately 260 positions gross and 249 positions net
and $1 million of other costs.

The following table summarizes the IT Plan Initial Accrual and the activity in
that accrual during 2001. Approximately $8 million of the remaining accrual is
expected to be paid out during 2002.

IT PLAN INITIAL ACCRUAL

<TABLE>
<CAPTION>
                                                           EMPLOYEE
                                                          TERMINATION      IMPAIRED
                                                          AND RELATED        ASSET         OTHER
                                                         BENEFIT COSTS      CHARGES        COSTS           TOTAL
                                                         -------------- -------------- --------------  ---------------
(In millions)
<S>                                                      <C>            <C>            <C>             <C>
Initial accrual                                            $        29             32    $         1     $         62
Costs that did not require cash                                      -            (32)             -              (32)
Payments charged against liability                                 (19)             -              -              (19)
                                                         -------------- -------------- --------------  ---------------

ACCRUED COSTS AT DECEMBER 31, 2001                         $        10              -    $         1     $         11
                                                         ============== ============== ==============  ===============
</TABLE>


                                       14
<PAGE>

Through December 31, 2001, 249 employees were released due to the IT Plan,
nearly all of whom were technology support staff.

The IT Plan is not expected to result in decreased operating expense in the
foreseeable future. This is because savings from the workforce reduction will be
used to fund new technology-related initiatives.

2001 PLAN

The overall goal of the 2001 Plan is to create a simplified and leaner
organization for customers and business partners. The major components of the
plan include a reduction in the number of strategic business units (SBUs) in the
property-casualty operations, changes in the strategic focus of the Life
Operations and consolidation of real estate locations. The reduction in the
number of property-casualty SBUs resulted in consolidation of SBU functions,
including underwriting, claims, marketing and finance. The strategic changes in
Life Operations include a decision to discontinue the variable life and annuity
business.

As summarized in the following table, the Company incurred $189 million pretax,
of restructuring and other related charges for the 2001 Plan. The Company does
not expect to incur significant amounts of additional charges with respect to
the 2001 Plan in any future period and, as a result, does not intend to
separately classify such expenses as restructuring and other related charges
when they occur.

2001 PLAN PRETAX CHARGES BY SEGMENT
<TABLE>
<CAPTION>
                                        EMPLOYEE
                                      TERMINATION         LEASE          IMPAIRED
                                      AND RELATED      TERMINATION         ASSET            OTHER
                                     BENEFIT COSTS        COSTS           CHARGES           COSTS             TOTAL
                                     --------------- ---------------- ---------------- ------------------ --------------
(In millions)
<S>                                  <C>             <C>              <C>              <C>                <C>
Standard Lines                         $       40      $         -      $         -      $         -        $       40
Specialty Lines                                 7                -                -                -                 7
CNA Re                                          2                4                -                -                 6
Group Operations                                1                -                -                -                 1
Life Operations                                 9                -                9               35                53
Corporate and Other                             9               52               21                -                82
                                     --------------- ---------------- ---------------- ------------------ --------------

TOTAL                                  $       68      $        56      $        30      $        35        $      189
                                     =============== ================ ================ ================== ==============
</TABLE>


All lease termination costs and impaired asset charges, except lease termination
costs incurred by operations in the United Kingdom and software write-offs
incurred by Life Operations, were charged to the Corporate and Other segment
because office closure and consolidation decisions were not within the control
of the other segments affected. Lease termination costs incurred in the United
Kingdom relate solely to the operations of CNA Re. All other charges were
recorded in the segment benefiting from the services or existence of the
employee or an asset.

The 2001 Plan charges incurred by Standard Lines were $40 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 1,063 positions, gross and net, of which $27
million related to severance and outplacement costs and $13 million related to
other salary costs. Through December 31, 2001, approximately 510 employees were
released due to the 2001 Plan. Approximately 272 of these employees were
administrative, technology or financial support staff; approximately 164 of
these employees were underwriters, claim adjusters and related insurance
services staff; and approximately 74 of these employees were in various other
positions.


                                       15
<PAGE>

The 2001 Plan charges incurred by Specialty Lines were $7 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 177 positions, gross and net, of which $5 million
related to severance and outplacement costs and $2 million related to other
salary costs. Through December 31, 2001, approximately 107 employees were
released due to the 2001 Plan. Approximately 47 of these employees were
administrative, technology or financial support staff; approximately 45 of these
employees were underwriters, claim adjusters and related insurance services
staff; and approximately 15 of these employees were in various other positions.

The 2001 Plan charges incurred by CNA Re were $6 million. Costs related to
employee termination and related benefit costs for planned reductions in the
workforce of 33 positions, gross and net, amounted to $2 million, all of which
related to severance and outplacement costs. Through December 31, 2001, no
employees in CNA Re were released due to the 2001 Plan. The remaining $4 million
of charges incurred by CNA Re related to lease termination costs.

The 2001 Plan charges incurred by Group Operations were $1 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 38 positions, gross and net. Through December 31,
2001, no employees in Group Operations were released due to the 2001 Plan.

The 2001 Plan charges incurred by Life Operations were $53 million. Costs
related to employee termination and related benefit costs for planned reductions
in the workforce of 356 positions, gross and net, amounted to $9 million, of
which $8 million related to severance and outplacement costs and $1 million
related to other salary costs. Through December 31, 2001, approximately seven
employees were released due to the 2001 Plan, which were primarily
administrative, technology and financial support staff positions. Life
Operations incurred $9 million of impaired asset charges related to software.
Other costs of $35 million in Life Operations relate to a write-off of deferred
acquisition costs on in-force variable life and annuity contracts as the Company
believes that the decision to discontinue these products will negatively impact
the persistency of the business.

The 2001 Plan charges incurred by the Corporate and Other segment were $82
million. Costs related to employee termination and related benefits costs for
planned reductions in the workforce of 194 positions, gross and net, amounted to
$9 million, of which $6 million related to severance and outplacement costs and
$3 million related to other salary costs. Through December 31, 2001, 129
employees were released due to the 2001 Plan. Approximately 114 of these
employees were administrative, technology or financial support staff; and
approximately 15 of these employees were in various other positions. The
Corporate and Other segment also incurred $73 million of lease termination and
asset impairment charges related to office closure and consolidation decisions
not within the control of the other segments affected.

In connection with the 2001 Plan, the Company accrued $189 million of these
restructuring and other related charges (the 2001 Plan Initial Accrual). These
charges include employee termination and related benefit costs, lease
termination costs, impaired asset charges and other costs.



                                       16
<PAGE>

The following table summarizes the 2001 Plan Initial Accrual and the activity in
that accrual during 2001. Approximately $94 million of the remaining accrual is
expected to be paid out during 2002.

2001 PLAN INITIAL ACCRUAL

<TABLE>
<CAPTION>
                                        EMPLOYEE
                                       TERMINATION        LEASE          IMPAIRED
                                       AND RELATED     TERMINATION         ASSET             OTHER
                                      BENEFIT COSTS       COSTS           CHARGES            COSTS            TOTAL
                                     --------------- ---------------- ---------------- ------------------ --------------
(In millions)
<S>                                  <C>             <C>              <C>              <C>                <C>
Initial accrual                        $         68    $         56     $         30     $        35        $      189
Costs that did not require cash                   -               -                -             (35)              (35)
Payments charged against liability               (2)              -                -                                (2)
                                     --------------- ---------------- ---------------- ------------------ --------------

ACCRUED COSTS DECEMBER 31, 2001        $         66    $         56     $         30     $         -        $      152
                                     =============== ================ ================ ================== ==============
</TABLE>


The majority of the positions impacted by the restructuring that were not
released by December 31, 2001 are expected to be released in the first quarter
of 2002. The real estate consolidation will occur throughout 2002; however, the
full level of savings from the consolidation will not be realized until the
fourth quarter. Management anticipates that the restructuring activities in 2001
will result in cost savings of approximately $100 million in 2002.

Additionally, at December 31, 2000, an accrual of $7 million for lease
termination costs remained related to the August 1998 restructuring (1998 Plan).
Approximately $6 million of these costs were paid in 2001, resulting in a
remaining accrual of $1 million at December 31, 2001. No restructuring and other
related charges related to the 1998 Plan were incurred during 2001 or 2000.
Restructuring and other related charges for the 1998 Plan amounted to $83
million in 1999.

TERRORISM EXPOSURE

CNA and the insurance industry incurred substantial losses related to the tragic
events of September 11, 2001. For the most part, the Company believes the
industry was able to absorb the loss of capital from these losses, but the
capacity to withstand the effect of any additional terrorism events was
significantly diminished. The public debate following September 11 centered on
the role, if any, the U.S. federal government should play in providing a
"terrorism backstop" for the industry. Several legislative proposals were
introduced, but as yet, Congress has not enacted any of the proposed solutions.

Without any federal backstop in place, CNA's businesses are exposed to losses
arising from terrorism events. The Company is attempting to mitigate this
exposure through its underwriting practices, policy terms and conditions, and
use of reinsurance.

While the unexpired portion of the Company's current reinsurance program
generally provides coverage for terrorism events, the Company expects that
future property-casualty and certain group life and accident reinsurance
renewals will either exclude coverage or be significantly limited with respect
to terrorism events. The Company does not expect any terrorism exclusion to be
included in future individual life reinsurance renewals.

The Company is generally including a terrorism exclusion or sub-limit in its
primary and reinsurance assumed policy forms and contracts for large property
risks in selected geographic areas. General liability and commercial auto
policies for large commercial customers also generally exclude terrorism where
permissible by law. The primary property and casualty policy forms applicable to
new and renewal policies for small and middle market commercial



                                       17
<PAGE>

customers will generally include a terrorism exclusion; however, these policy
forms have not yet been approved in all states. The Company is generally
prohibited from excluding terrorism exposure from its primary workers
compensation, individual life and group life and health policies.

2002 REINSURANCE CONSIDERATIONS

In addition to the terrorism coverage issues discussed, the Company expects
other significant changes related to the reinsurance environment in 2002. Due to
the significant increase in reinsurance costs for several lines of insurance,
the Company expects to purchase less reinsurance protection in 2002 than in
2001. The amount of reinsurance purchased has a direct impact on the level of
gross and net exposure that the Company is willing to underwrite in certain
lines. For example, the net retention on a substantial portion of Standard
Lines' workers compensation exposure will generally increase from $500,000 per
each loss occurrence in 2001 to $10 million per each loss occurrence in 2002.
The Company expects to retain approximately $60 million more premium in 2002 as
a result of this increase in retention in workers compensation exposure. Other
property-casualty exposures expected to be significantly impacted by changes in
the level, cost and availability of reinsurance purchased in 2002 include, but
are not limited to, surety, workers compensation, catastrophe and professional
liability. The Company has purchased less finite reinsurance in 2002 than in
prior years.

The reduced level of reinsurance purchased in 2002 will likely increase the
volatility of reported losses; however, the Company will also retain more
premium than in prior years.

The Company is currently finalizing its aggregate reinsurance protection for
2002 for a substantial portion of its property-casualty business. The
reinsurance protection will be handled on a funds withheld basis.

STANDARD LINES

BUSINESS OVERVIEW

Standard Lines builds on the Company's long and successful relationship with the
independent agency distribution system and network of brokers to market a broad
range of property-casualty insurance products and services to small,
middle-market and large businesses. The Standard Lines' operating model focuses
on underwriting performance, exposure based pricing, relationships with
selective distribution sources and aligning resources closer to our customers.
Also, Standard Lines, primarily through RSKCo(SM), provides total risk
management services relating to claim services, loss control, cost management
and information services to the commercial insurance marketplace.

Standard Lines includes Property and Casualty, Excess & Surplus and RSKCo(SM).



                                       18
<PAGE>

PROPERTY AND CASUALTY (P&C) provides standard property-casualty insurance
products such as workers compensation, general and product liability, property
and commercial auto coverages through traditional and innovative advanced
financial risk products to a wide range of businesses. The majority of P&C
customers are small and middle-market businesses, with less than $1 million in
annual insurance premiums. Most insurance programs are provided on a guaranteed
cost basis; however, P&C has the capability to offer specialized, loss-sensitive
insurance programs to those risks viewed as higher risk and less predictable in
exposure. The target market for these specialized programs are large accounts
within the Fortune 1000 businesses.

P&C has begun streamlining its field structure from 169 branch locations to five
regions consisting of 68 branch locations in 63 cities. Each branch provides the
marketing, underwriting and risk control expertise on the entire portfolio of
products. In addition, these branches provide streamlined claim services through
the same regional structure. These branches offer efficient and quality service
and focus on the total claims outcome through specialized claims handling and
timely claims reporting. A centralized processing center for small and
middle-market customers that is located in Maitland, Florida, handles policy
processing and accounting, and also acts as a call center for all branches to
optimize customer service. The branches and service centers are all located in
the United States.

EXCESS & SURPLUS (E&S) provides specialized insurance and other financial
products for selected commercial risks on both an individual customer or program
basis. Risks insured by E&S are generally viewed as higher risk and less
predictable in exposure than those covered by standard insurance markets. By
combining superior underwriting and financial expertise with an in-depth
understanding of each customer's unique and changing risks, E&S develops
innovative business solutions that are valued by the customer and producer.
E&S's products are distributed throughout the United States through specialist
producers, program agents, and P&C's agents and brokers. E&S has specialized
underwriting and claims resources in Chicago, New York City, Denver and
Columbus.

RSKCO(SM) operates within the same regionalized organization as P&C and provides
the following services:

Claim Services provides services that allow customers to select from a single
source the desired level of service ranging from an integrated claims package to
any component service.

Loss Control provides pre-loss prevention services that include industrial
hygiene, laboratory, ergonomics, field consulting and training, property,
environmental and transportation loss control. Commercial driver training is
provided through Smith System Driver Improvement Institute, Inc., a wholly owned
subsidiary.

Cost Management provides post-loss cost control services through case
management, medical bill review, preferred provider organizations and other
unique partnerships to reduce lost work days through rapid response, quality
care and effective coordination.

Information Services provides services including data access, reporting tools,
information and benchmarking analysis, consulting and custom reporting services.



                                       19
<PAGE>

The following table details operating results for Standard Lines.

OPERATING RESULTS

<TABLE>
<CAPTION>
Years ended December 31                                                                2001              2000               1999
(In millions)                                                                        -------            -------            -------
<S>                                                                                  <C>                <C>                <C>
NET WRITTEN PREMIUMS                                                                 $ 2,963            $ 3,869            $ 4,113
                                                                                     =======            =======            =======

Net earned premiums                                                                  $ 2,454            $ 3,970            $ 4,241
Claims, benefits and insurance related expenses                                        3,675              4,480              4,919
Restructuring and other related charges                                                   36                 -                  59
                                                                                     -------            -------            -------

   Underwriting loss                                                                  (1,257)              (510)              (737)
                                                                                     -------            -------            -------

Net investment income                                                                    484                736                709
Other revenues                                                                           340                344                334
Other expenses                                                                           306                309                291
Non-insurance restructuring and other related charges                                     10                 -                  10
                                                                                     -------            -------            -------

  Pretax operating (loss) income                                                        (749)               261                  5

Income tax benefit (expense)                                                             297                (59)                31
                                                                                     -------            -------            -------

NET OPERATING (LOSS) INCOME                                                          $  (452)           $   202            $    36
                                                                                     =======            =======            =======

RATIOS

  Loss and loss adjustment expense                                                      97.6%              80.5%              86.2%
  Expense                                                                               49.0               30.3               30.6
  Dividend                                                                               4.6                2.1                0.6
                                                                                     -------            -------            -------

  COMBINED                                                                             151.2%             112.9%             117.4%
                                                                                     =======            =======            =======


ADJUSTED UNDERWRITING LOSS*                                                          $  (343)
                                                                                     =======

2001 ADJUSTED RATIOS*

    Loss and loss adjustment expense                                                    74.0%
    Expense                                                                             32.3
    Dividend                                                                             3.1
                                                                                     -------

    COMBINED                                                                           109.4%
                                                                                     =======
</TABLE>


*The adjusted underwriting loss and adjusted ratios exclude the impact of the
second quarter 2001 reserve strengthening, the WTC event, corporate aggregate
reinsurance treaties and restructuring and other related charges.

2001 COMPARED WITH 2000

Net operating results decreased $654 million in 2001 as compared with 2000. The
after-tax impact of the second quarter 2001 reserve strengthening, net of the
related corporate aggregate reinsurance treaty benefit, was $619 million for
Standard Lines. The reserve strengthening related primarily to commercial
multiple-peril, general liability, commercial automobile liability coverages,
large account liability coverages and related retrospective premium accruals.
The strengthening was based upon detailed claim reviews, assessments of legal
developments affecting these coverages and actuarial analyses completed in the
second quarter of 2001. In response to the adverse trends indicated by the
reviews, changes were made to more closely involve legal counsel on claims
affected by the legal developments and to discontinue writing classes of
business where adequate pricing cannot be achieved for the exposure.

In addition to the impact of the reserve strengthening recorded in the second
quarter of 2001, net operating results in 2001 declined $50 million as a result
of the estimated losses from the WTC event, net of the related corporate
aggregate reinsurance treaties benefit, and $30 million for restructuring and
other related charges. These declines were partially offset by a $49 million
after-tax benefit from corporate aggregate reinsurance treaties on Core
operations.

                                       20
<PAGE>

Excluding these significant items, net operating results in 2001 decreased $4
million due primarily to decreased net investment income, principally as a
result of a $69 million decline in limited partnership income and increased
interest expense for finite reinsurance other than the corporate aggregate
reinsurance treaties. This decline was partially offset by improved Core
underwriting results across most lines, except for workers compensation. Net
operating income in 2000 benefited from a reduction of accruals for certain
insurance-related assessments due to changes in the basis on which the
assessments were calculated. The after-tax impact of this change was $60 million
in 2000.

The adjusted combined ratio decreased 3.5 points in 2001 as compared with 2000,
and the adjusted underwriting results improved $167 million. The change in the
adjusted underwriting results and the adjusted combined ratio was driven by a
decrease in the adjusted loss ratio, partially offset by increases in both the
adjusted expense and dividend ratios. The adjusted loss ratio decline of 6.5
points reflects lower prior year adverse loss development (excluding the second
quarter 2001 reserve strengthening), and improved current year underwriting
results across most standard lines, particularly the automobile and package
lines, from earned rate achievement and re-underwriting efforts undertaken last
year. The adjusted expense ratio increased 2.0 points due primarily to the
reduced net earned premium base in 2001, an increase in the accrual for
guarantee fund assessments related to the Reliance insolvency and the decreased
benefit from the change in the assessment base for certain insurance-related
assessments discussed above. These declines were partially offset by lower
acquisition expenses due to higher ceding commissions. The adjusted dividend
ratio increased 1.0 points due primarily to adverse development in dividend
reserves in 2001 compared with favorable development taken in 2000.

Net written premiums for Standard Lines decreased $906 million in 2001 as
compared with the prior year as a result of $564 million of ceded premiums
related to the corporate aggregate reinsurance treaties, additional ceded
premiums arising from the second quarter 2001 reserve strengthening and a change
in estimate for involuntary market premium accruals. Net written premiums also
declined as a result of increased adverse premium development (excluding the
second quarter 2001 reserve strengthening), increased ceded premiums for
reinsurance treaties other than the corporate aggregate reinsurance treaties and
$119 million due to a change in the timing of recording written premiums for
policies with future effective dates. This change was made in conjunction with
statutorily required changes in recording written premiums and has no impact on
net earned premiums or net income. These declines were partially offset by
increased new business in the primary property and small and middle-market
lines.

Net earned premiums decreased $1,516 million in 2001 as compared with 2000. This
decline is attributable primarily to the declines noted above in net written
premiums and an additional $365 million due to a change in estimate of
retrospective premium accruals related to the second quarter 2001 reserve
strengthening. The change in estimate of retrospective premium receivables was
based upon the Company's completion of comprehensive studies related to
estimated premium receivable accruals on retrospectively rated insurance
policies and involuntary market facilities. The studies included the review of
all such retrospectively rated insurance policies and the current estimate of
ultimate losses.

Standard Lines achieved an average rate increase of 17% in 2001 for the
contracts that renewed during the year and had a retention rate of 75% for those
contracts that were up for renewal.

                                       21
<PAGE>

2000 COMPARED WITH 1999

Net operating income increased $166 million in 2000 as compared with 1999 based
on improved underwriting results, increased net investment income due primarily
to a $54 million increase in limited partnership income and restructuring and
other related charges that occurred in 1999 that did not occur in 2000. Net
operating income in both 2000 and 1999 benefited from a change in estimate for
certain insurance-related assessments due to changes in the calculation base.
The after-tax impact of this change was $60 million in 2000 and $51 million in
1999.

The combined ratio improved 4.5 points in 2000 as compared with 1999 and
underwriting results improved $227 million. The loss ratio improvement of 5.7
points is due to underwriting actions including the increased use of
reinsurance, the continued efforts to achieve adequate rates for exposure
underwritten, the non-renewal of unprofitable business and lower catastrophe
losses than in 1999. These improvements were partially offset by adverse
property and large account casualty experience for 2000 and prior accident
years. Also, the 1999 loss ratio included adverse loss development related to
automobile, workers compensation and packaged general liability exposures. The
expense ratio improved 0.3 points principally as a result of decreased
underwriting expenses and the absence of restructuring and other related
charges, partially offset by a decrease in ceding commissions received relating
to a change in the structure of reinsurance. The dividend ratio increase of 1.5
points is attributable to decreased favorable development in dividend reserves
for Standard Lines in 2000 as compared with 1999.

Standard Lines' net written premiums decreased $244 million in 2000 as compared
with 1999. Net earned premiums for Standard Lines decreased $271 million in 2000
as compared with 1999. These declines were due to the continued effort to
re-underwrite business and obtain adequate rates for exposure underwritten.

SPECIALTY LINES

BUSINESS OVERVIEW

Specialty Lines provides a broad array of professional, financial and specialty
domestic and international property-casualty products and services through a
network of brokers, managing general agencies and independent agencies.
Specialty Lines provides solutions for managing the risks of its clients,
including architects, engineers, lawyers, healthcare professionals, financial
intermediaries and corporate directors and officers. Product offerings also
include surety and fidelity bonds, ocean marine insurance and vehicle and
equipment warranty services.

Specialty Lines includes the following business groups: CNA Pro, CNA HealthPro,
CNA Guaranty and Credit, Surety, CNA Global and Warranty.

CNA PRO is one of the largest providers of management and professional liability
insurance and risk management services in the United States. Products are
focused on errors and omissions insurance for professional firms. CNA Pro
remains a leader as the largest insurer of architects and engineers, realtors
and non-Big Five accounting firms and is a significant underwriter of law firms.
These products, with the exception of large law firms, are underwritten in
partnership with the highest-quality managing general underwriters.

CNA Pro's Open Brokerage area offers directors and officers, errors and
omissions, employment practices liability, fiduciary and fidelity coverages.
Target markets range from small private companies to large public corporations.
Specific areas of opportunity include the middle



                                       22
<PAGE>

market, where CNA offers its broad product line to small to medium-sized
businesses, the not-for-profit sector and financial institutions.

CNA HEALTHPRO offers a comprehensive array of insurance products to serve the
full spectrum of the healthcare delivery system. Products are distributed on a
national basis through a variety of channels including brokers, agents and
managing general underwriters. Key customer segments include allied healthcare
providers, dental professionals and mid-size and large healthcare facilities and
delivery systems. Additionally, CNA HealthPro offers risk management consulting
services to assist customers in managing quality of care risks associated with
the delivery of healthcare. Claims services are provided to manage and resolve
claims as effectively, equitability and expeditiously as possible. In addition,
Caronia Corporation, an affiliate of CNA HealthPro, provides third-party claims
administration for healthcare providers and facilities.

CNA GUARANTY AND CREDIT provides credit insurance on short-term trade
receivables for domestic and international clients. CNA Guaranty provides
reinsurance to insurers who provide financial guarantees to issuers of asset-
backed securities, money market funds and investment-grade corporate debt
securities. The Guaranty business underwritten by CNA's insurance affiliates is
currently in run-off. The run-off of this business will be a multi-year process.

Also included in CNA Guaranty and Credit is R.V.I. Guaranty Co. Ltd. (RVI), an
unconsolidated affiliate. RVI is the largest monoline residual value insurer in
the world, offering coverages to protect the insured against a decrease in the
market value of a properly maintained asset at the termination of a lease.


SURETY consists primarily of CNA Surety Corporation (CNA Surety), and its
insurance subsidiaries. CNA Surety is traded on the New York Stock Exchange
(SUR) and is the largest publicly traded provider of surety bonds, with
approximately 8.5% of that market. Among its domestic competitors, CNA Surety
has one of the most extensive distribution systems and one of the most diverse
surety product lines, offering small, medium and large contract and commercial
surety bonds. CNA Surety provides surety and fidelity bonds in all 50 states
through a combined network of approximately 35,000 independent agencies. CNA
owns approximately 64% of CNA Surety.

CNA GLOBAL consists of Marine and Global Standard Lines.

Marine serves domestic and global ocean marine needs, with markets extending
across North America, Europe and throughout the world. Marine offers hull,
cargo, primary and excess marine liability, marine claims and recovery products
and services. Business is sold through national brokers, regional marine
specialty brokers and independent agencies.

Global Standard Lines is responsible for coordinating and managing the direct
business of the foreign property-casualty operations of CNA. This business
identifies and capitalizes on strategic indigenous opportunities outside the
United States. In addition, Global Standard Lines provides United States-based
customers expanding their operations overseas with a single source for their
commercial insurance needs. Global Standard Lines currently oversees operations
in Hawaii, Europe, Latin America, Canada and Asia.

WARRANTY provides vehicle warranty services that protect individuals and
businesses from the financial burden associated with breakdown,
under-performance or maintenance of a product. Products are distributed via a
sales force employed or contracted through a program administrator. Warranty
consists primarily of CNA National Warranty Corporation, which sells vehicle
warranty services in the United States and Canada.



                                       23
<PAGE>

The following table details operating results for Specialty Lines.

OPERATING RESULTS

<TABLE>
<CAPTION>
Years ended December 31                                                           2001                 2000                 1999
(In millions)                                                                    -------              -------              -------
<S>                                                                              <C>                  <C>                  <C>

NET WRITTEN PREMIUMS                                                             $ 1,972              $ 1,954              $ 1,972
                                                                                 =======              =======              =======

Net earned premiums                                                              $ 1,915              $ 1,868              $ 1,942
Claims, benefits and insurance related expenses                                    2,654                1,933                2,159
Restructuring and other related charges                                                9                    -                    -
                                                                                 -------              -------              -------

   Underwriting loss                                                                (748)                 (65)                (217)
                                                                                 -------              -------              -------

Net investment income                                                                318                  383                  372
Other revenues                                                                       123                  139                  138
Other expenses                                                                       148                  143                  127
                                                                                 -------              -------              -------

  Pretax operating (loss) income                                                    (455)                 314                  166

Income tax benefit (expense)                                                         148                  (91)                 (37)
Minority interest                                                                    (21)                 (24)                 (28)
                                                                                 -------              -------              -------

NET OPERATING (LOSS) INCOME                                                      $  (328)             $   199              $   101
                                                                                 =======              =======              =======

RATIOS

  Loss and loss adjustment expense                                                  97.3%                66.9%                74.9%
  Expense                                                                           41.5                 36.5                 36.1
  Dividend                                                                           0.2                  0.1                  0.2
                                                                                 -------              -------              -------

  COMBINED                                                                         139.0%               103.5%               111.2%
                                                                                 =======              =======              =======


ADJUSTED UNDERWRITING LOSS*                                                      $  (339)
                                                                                 =======

2001 ADJUSTED RATIOS*

    Loss and loss adjustment expense                                                77.3%
    Expense                                                                         39.5
    Dividend                                                                         0.2
                                                                                 -------

    COMBINED                                                                       117.0%
                                                                                 =======
</TABLE>


*The adjusted underwriting loss and adjusted ratios exclude the impact of the
second quarter 2001 reserve strengthening, the WTC event, corporate aggregate
reinsurance treaties and restructuring and other related charges.

2001 COMPARED WITH 2000

Net operating results decreased $527 million in 2001 as compared with 2000. The
after-tax impact of the second quarter 2001 reserve strengthening on Specialty
Lines was $277 million. The reserve strengthening related primarily to medical
malpractice and national for-profit nursing home chains with exposure in Florida
and Texas. This strengthening was necessitated by the continuing emergence of
reported losses in excess of expectations and a thorough review of claim
exposures. In response to these adverse trends, Specialty Lines withdrew from
writing these coverages in certain states and instituted large rate increases.
Additionally, reserve strengthening related to the marine business resulted from
an increase in large claim frequency in marine cargo and hull coverages for
accident years 1998 through 2000. Additionally, Specialty Lines strengthened
reserves due to higher than expected losses arising from the high-hazard
commercial auto business. Specialty Lines is taking rate action and reducing
exposure to unprofitable marine cargo and hull classes of business and has
exited the high-hazard commercial auto business.

Net operating results in 2001 were adversely impacted by $12 million of
estimated losses related to the WTC event, net of the related corporate
aggregate reinsurance treaties benefit,




                                       24
<PAGE>

and $6 million for restructuring and other related charges. Partially offsetting
these charges was a $14 million benefit due to the corporate aggregate
reinsurance treaties on Core operations.

Excluding these significant items, net operating results decreased $246 million
in 2001 as compared with 2000 due principally to reserve strengthening of $69
million after-tax ($77 million pretax) related primarily to increasing the
current underwriting year loss ratio for the London-based commercial and marine
operations in the fourth quarter of 2001. The tax benefit on the London reserve
strengthening is lower than the statutory tax rate due to a limitation on the
level of benefit that can be recognized for the London operation. Additionally,
net operating results declined as a result of the write-off of unrecoverable
deferred acquisition costs and better aligning premium earnings patterns with
the emergence of claims in the vehicle warranty line of business, a decreased
benefit from the use of finite reinsurance and decreased net investment income,
principally resulting from a $29 million decline in limited partnership income.

Specialty Lines also recorded charges of $30 million after-tax related to the
recent bankruptcy filing of certain Enron entities. These charges consisted of
$17 million after-tax of losses in connection with surety exposures, including
advance payment obligations bonds and $13 million after-tax of other operating
expenses in connection with collateralized debt obligations, a credit
enhancement product.

The adjusted combined ratio increased by 13.5 points in 2001 as compared with
2000 and the adjusted underwriting results declined by $274 million. This change
is due to increases in both the adjusted loss and expense ratios. The adjusted
loss ratio increased 10.4 points primarily as a result of losses related to
Enron, favorable loss development recorded in 2000 for the architects and
engineers business not present in 2001, and unfavorable underwriting results in
global and marine lines related to the current accident year reserve
strengthening discussed above. The increase in the adjusted expense ratio is due
primarily to the write-off of unrecoverable deferred acquisition costs in the
vehicle warranty line of business and increased expenses in the European
operations.

Net written premiums for Specialty Lines in 2001 increased $18 million in 2001
as compared with 2000. This increase was due to strong production in the law
firms, long term care, and architects and engineers products as well as
increased rate achievement in Europe, primarily in property lines and decreased
ceded premiums related to finite reinsurance for the medical professional
liability lines. Partially offsetting these increases was $77 million as a
result of additional ceded premiums related to the corporate aggregate
reinsurance treaties, as well as declines in the warranty and guaranty lines.
Net written premiums also decreased $23 million due to a change in the timing of
recording written premiums for policies with future effective dates. This change
was made in conjunction with statutorily required changes in recording written
premiums and has no impact on net earned premiums or net income.

Net earned premiums increased $47 million in 2001 as compared with 2000 related
primarily to the reasons noted above as well as the reserve for retrospective
premium increase recorded in 2000. These increases were partially offset by
adverse experience in retrospective premium accruals recorded in the second
quarter 2001 reserve strengthening. The non-medical and medical professional
liability and financial products lines of business achieved an average rate
increase of 17% with a retention rate of 78% for 2001 for those contracts that
were up for renewal. Global Lines achieved 11% average rate increases across its
businesses during 2001 and retention rates were in the 80 percent range.
Retention rates above apply to Specialty Lines excluding the CNA Guaranty and
Credit, Surety and Warranty businesses.



                                       25
<PAGE>

2000 COMPARED WITH 1999

Net operating income for Specialty Lines increased $98 million in 2000 as
compared with 1999, principally from the improvement in the underwriting results
and increased net investment income, including a $22 million after-tax increase
in limited partnership income, partially offset by an increase in other expenses
related to the non-insurance operations in the warranty business.

The combined ratio improved 7.7 points in 2000 as compared with 1999 and
underwriting results improved $152 million. These improvements are the result of
the ongoing commitment to underwriting discipline reflected by an 8.0 point
decline in the loss ratio, partially offset by a 0.4 point increase in the
expense ratio. The 2000 loss ratio was impacted by favorable loss experience in
the retrospectively rated architects and engineers business and the increased
use of reinsurance for the medical professional liability lines, partially
offset by large loss experience in the guaranty and credit business and adverse
current and prior year loss experience in the vehicle warranty insurance line of
business. The 1999 loss ratio was unfavorably impacted by adverse loss
experience primarily in the medical malpractice lines of business. Acquisition
and underwriting expenses have decreased year-over-year, but the expense ratio
has increased due to the reduced net earned premium base.

Net written premiums for Specialty Lines for 2000 declined $18 million as
compared with 1999. Net earned premiums declined $74 million as compared with
1999. These premium declines relate principally to: 1) active decisions to renew
only those accounts that meet current underwriting guidelines supporting the
ongoing commitment to underwriting discipline; 2) an increase in the
retrospective return premium relating to favorable loss experience in the
retrospectively rated architects and engineers business; and 3) a $30 million
decline due to the increased use of reinsurance for the medical professional
liability lines of CNA HealthPro. These declines were partially offset by growth
in the commercial casualty and property lines in the European operations, as
well as growth in the commercial warranty and surety lines.

CNA RE

BUSINESS OVERVIEW

CNA Re operates globally as a reinsurer in the broker market for treaty products
and in the direct market for facultative products. Both its treaty and
facultative operations are headquartered in Chicago, and it also operates
facultative branch offices in Atlanta, Cleveland, Dallas, Hartford, Los Angeles,
New York and Philadelphia.

CNA Re's operations also include the business of CNA Re U.K., a United Kingdom
reinsurance company. As of the third quarter of 2001, CNA Re's U.K. subsidiaries
have ceased new underwriting activities. The Company plans to dispose of the
U.K. subsidiaries, with the intent of completing the disposition in 2002. Such a
disposition is subject to regulatory approval. Refer to the Investments section
on the following pages and Note P to the Consolidated Financial Statements for
more information on the planned disposition.

CNA Re markets products in the following treaty business segments: standard
lines, surplus lines, global catastrophe, specialty lines and financial
reinsurance. In addition, CNA Re markets property and casualty facultative
products directly to clients through its facultative offices, as well as through
smartfac.com, CNA Re's online facultative submission site.



                                       26
<PAGE>

The following table details operating results for CNA Re.

OPERATING RESULTS

<TABLE>
<CAPTION>
Years ended December 31                                                           2001                 2000                 1999
(In millions)                                                                    -------              -------              -------
<S>                                                                              <C>                  <C>                  <C>
NET WRITTEN PREMIUMS                                                             $   524              $   951              $ 1,275
                                                                                 =======              =======              =======

Net earned premiums                                                              $   641              $ 1,089              $ 1,176
Claims, benefits and insurance related expenses                                    1,752                1,186                1,369
Restructuring and other related charges                                                6                    -                    -
                                                                                 -------              -------              -------

   Underwriting loss                                                              (1,117)                 (97)                (193)
                                                                                 -------              -------              -------

Net investment income                                                                175                  212                  170
Other revenues                                                                         5                    5                   (1)
Other expenses                                                                         3                    4                   (5)
                                                                                 -------              -------              -------

  Pretax operating (loss) income                                                    (940)                 116                  (19)

Income tax benefit (expense)                                                         274                  (42)                  12
                                                                                 -------              -------              -------

NET OPERATING (LOSS) INCOME                                                      $  (666)             $    74              $    (7)
                                                                                 =======              =======              =======

RATIOS

  Loss and loss adjustment expense                                                 231.7%                81.6%                84.9%
  Expense                                                                           42.7                 27.3                 31.5
                                                                                 -------              -------              -------

  COMBINED                                                                         274.4%               108.9%               116.4%
                                                                                 =======              =======              =======


ADJUSTED UNDERWRITING LOSS*                                                      $  (264)
                                                                                 =======

2001 ADJUSTED RATIOS*

    Loss and loss adjustment expense                                                99.6%
    Expense                                                                         38.1
                                                                                 -------

    COMBINED                                                                       137.7%
                                                                                 =======
</TABLE>

*The adjusted underwriting loss and adjusted ratios exclude the impact of the
second quarter 2001 reserve strengthening, the WTC event, corporate aggregate
reinsurance treaties and restructuring and other related charges.

2001 COMPARED WITH 2000

Net operating results decreased $740 million in 2001 as compared with 2000. The
after-tax impact, net of the related corporate aggregate reinsurance treaty
benefit, of the second quarter 2001 reserve strengthening on CNA Re was $384
million, including $37 million for APMT claims. The strengthening was based upon
second quarter reviews that showed the emergence of higher than expected
reported losses. The reserve strengthening related to a number of lines,
including excess of loss liability and professional liability in accident years
1997 to 2000.

Net operating results also decreased $176 million due to estimated losses
related to the WTC event, $6 million due to restructuring and other related
charges and $2 million from corporate aggregate reinsurance treaties on Core
operations.

Excluding these significant items, net operating results decreased $171 million
in 2001 as compared with 2000 due primarily to a $160 million after-tax charge
to strengthen prior underwriting year loss reserves for CNA Re U.K. There was no
tax benefit related to this charge due to the inability to recover further tax
benefits related to the underwriting losses of CNA Re U.K. During the fourth
quarter, the Company updated its impairment analysis of subsidiaries held for
sale, including the U.K. subsidiaries of CNA Re. The updated impairment analysis
for CNA Re U.K. indicated that a $285 million after-tax realized loss recorded
in the second quarter of 2001 should be reduced, primarily because the net
assets of CNA Re U.K.




                                       27
<PAGE>

had been significantly diminished by its operating losses in the second half of
2001. In addition, the Company updated its estimate of disposal costs, including
anticipated capital contributions, to reflect changes in the planned structure
of the anticipated sale. Additionally, net operating results decreased as a
result of Enron-related losses of $22 million primarily for reinsurance of
surety obligations, and decreased net investment income, including a $13 million
after-tax decline in limited partnership income. These declines were partially
offset by improved current accident year results.

The adjusted combined ratio increased 28.8 points in 2001 as compared with 2000
and the adjusted underwriting results declined $167 million. The change in the
adjusted combined ratio and adjusted underwriting results is due to increases in
both the adjusted loss and expense ratios. The adjusted loss ratio increased
18.0 points due to prior underwriting year adverse loss development and
Enron-related losses discussed above. Partially offsetting this increase was a
decrease in adjusted losses as a result of improvement in the current accident
year loss ratios in the domestic and U.K. operations. While operating expenses
have decreased for 2001 as compared with 2000, the expense ratio has increased
due to the reduced net earned premium base.

Net written premiums for CNA Re decreased $427 million in 2001 as compared with
2000 as a result of $161 million of ceded premiums related to the corporate
aggregate reinsurance treaties and the announced intention to sell the U.K.
subsidiaries. These declines were partially offset by reinstatement and
additional premiums of $89 million related to the WTC event. Net earned premiums
decreased $448 million in 2001 as compared with 2000 related primarily to the
reasons noted above.

2000 COMPARED WITH 1999

Net operating income increased $81 million for CNA Re in 2000 as compared with
1999 due to improvements in underwriting results and an increase in investment
income, including a $12 million increase in limited partnership income.

The combined ratio improved 7.5 points in 2000 as compared with 1999 and
underwriting results improved $96 million. The improvement in the underwriting
results is attributable to improvements in both the loss and expense ratios. The
loss ratio improvement is attributable mainly to favorable 2000 catastrophe
experience as compared with 1999 catastrophe results that were negatively
impacted by a series of European windstorms, Hurricane Floyd and other
international catastrophes. The improvement in the expense ratio was related to
decreased contingent commissions in 2000.

Net written premiums for CNA Re for 2000 decreased $324 million as compared with
1999. Net earned premiums decreased $87 million as compared with 1999. These
declines reflect decisions not to renew contracts that management believed did
not meet its underwriting profitability targets, partially offset by modest rate
increases.

                                       28
<PAGE>

GROUP OPERATIONS

BUSINESS OVERVIEW

Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. Group Operations also provides health insurance
to federal employees, as well as life and health reinsurance.

Group Operations includes four principal business units: Group Benefits, Group
Reinsurance, Federal Markets and Life Reinsurance.

GROUP BENEFITS provides group term life insurance, short-term and long-term
disability, statutory disability, long-term care and accident products. Products
are marketed through a nationwide operation of 31 sales offices, third-party
administrators, managing general agents and insurance consultants.

GROUP REINSURANCE (formerly Provider Markets) is composed of two businesses.
Group Reinsurance assumes reinsurance from unaffiliated entities on group life,
accident and health products, as well as excess medical risk coverages for
self-funded employers. The other business, CNA Health Partners, which was sold
in 2001, provided comprehensive managed care services to employers offering
self-funded medical plans.

FEDERAL MARKETS is the second-largest provider of health insurance benefits to
federal employees, retirees and their families, insuring nearly one million
members under the Mail Handlers Benefit Plan (MHBP) offered through the Federal
Employees Health Benefit Plan (FEHBP). Federal Markets is responsible for all
claim management activities under the plan, such as large case management,
hospital and provider bill negotiations, fraud detection activities and vendor
contracts. Federal Markets also underwrites conversion policies and supplemental
coverages for plan members.

LIFE REINSURANCE reinsures individual life and health products marketed by
unaffiliated life insurance companies throughout North America. On December 31,
2000, CNA sold its Life Reinsurance business. See Note P to the Consolidated
Financial Statements for discussion of the Life Reinsurance transaction.




                                       29
<PAGE>

The following table details operating results for Group Operations.

OPERATING RESULTS

<TABLE>
<CAPTION>
Years ended December 31                                                    2001             2000            1999
(In millions)                                                            -------           -------         -------
<S>                                                                      <C>               <C>             <C>
Net earned premiums                                                      $ 3,458           $ 3,675         $ 3,571
Net investment income                                                        170               163             137
Other revenues                                                                20                49              40
                                                                         -------           -------         -------

   Total operating revenues                                                3,648             3,887           3,748
                                                                         -------           -------         -------

Benefits                                                                   3,005             3,068           3,053
Expenses                                                                     630               748             699
Restructuring and other related charges                                        1                 -               5
                                                                         -------           -------         -------

  Pretax operating income (loss)                                              12                71              (9)

Income tax benefit (expense)                                                   1               (21)              8
                                                                         -------           -------         -------

NET OPERATING INCOME (LOSS)                                              $    13           $    50         $    (1)
                                                                         =======           =======         =======
</TABLE>


2001 COMPARED WITH 2000

Net operating income decreased by $37 million in 2001 as compared with 2000.
This decrease is related primarily to estimated losses of $52 million after-tax
as a result of the WTC event. Net operating income also declined as a result of
the sale of Life Reinsurance and $13 million due to a decline in limited
partnership income. Life Reinsurance contributed net operating income of $22
million in 2000. Partially offsetting these declines were improvements as a
result of exiting unprofitable lines of approximately $40 million and increased
income in other product lines, primarily the disability and group long-term care
lines, of $11 million.

Net earned premiums for Group Operations decreased $217 million for 2001 as
compared with 2000. Net earned premiums declined $228 million as a result of the
sale of Life Reinsurance and $163 million in Group Reinsurance primarily as a
result of terminating unprofitable contracts with independent underwriting
agencies in 2000. These declines were partially offset by increases in Federal
Markets of $116 million due to increased medical cost trends and growth in Group
Benefits of $58 million, particularly in the disability and group long-term care
lines of business.

Group Operations achieved rate increases in 2001 that averaged approximately 4%
for the disability line of business. Premium persistency rates were in the
mid-80% range. For the group life line of business, rate increases averaged 1%
to 2%. Premium persistency rates were in the lower 80% range.

2000 COMPARED WITH 1999

Net operating income increased $51 million in 2000 as compared with 1999. This
increase relates to a $24 million improvement in Federal Markets due to the 1999
exit of unprofitable medical lines, a $34 million improvement in Group
Reinsurance, a $4 million improvement in Life Reinsurance and a $9 million
increase in limited partnership income. These improvements were partially offset
by an $18 million decline in Group Benefits due to favorable 1999 loss
experience in the group life line of business. The improvement associated with
Group Reinsurance relates to adverse experience and loss development for the
personal accident business recorded in 1999, which exceeded $7 million of exit
costs incurred from the




                                       30
<PAGE>

Management Services Organization (MSO) business and $13 million of adverse
development on the medical stop loss business in 2000. The decision to shut down
the MSO business was based on lack of demand as providers were backing away from
risk contracting.

Net earned premiums for Group Operations in 2000 increased $104 million as
compared with 1999. This increase was principally a result of a $41 million
increase in Group Benefits, primarily related to the group life line of
business; a $35 million increase in Life Reinsurance; an $18 million increase in
Group Reinsurance; and a $10 million increase in Federal Markets. The increases
in Group Benefits and Life Reinsurance relate to new business production.

LIFE OPERATIONS

BUSINESS OVERVIEW

Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long-term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers, and other independent insurance consultants.

Life Operations is composed of four principal groups: Individual Life,
Retirement Services, Long Term Care and Other Operations.


INDIVIDUAL LIFE primarily offers level premium term life insurance, universal
life insurance and related products. New sales of term life have placed CNA
among the top-five producers in the market in each of the past three years.

RETIREMENT SERVICES markets annuities and investment products and services to
both retail and institutional customers. In the institutional market, CNA has
benefited from strong sales and earnings of its Index 500 product, which is a
guaranteed investment contract that is indexed to the performance of the
Standard & Poor's 500(R) (S&P 500 (R)) Index. At the end of 2001, CNA announced
its intention to discontinue the retail variable annuity and life business as
part of the 2001 Plan.

LONG TERM CARE products provide reimbursement for covered nursing home and home
health care expenses incurred due to physical or mental disability. New sales of
Long Term Care have placed CNA among the top producers in the individual
marketplace in each of the past three years.

OTHER OPERATIONS include operations in certain international markets and
viatical settlements. Consistent with Life Operations business strategy to
sharpen its focus on insurance products and services, the Company has decided to
cease purchasing new viatical policies indefinitely.


                                       31
<PAGE>


The following table details operating results for Life Operations.

OPERATING RESULTS

<TABLE>
<CAPTION>
Years ended December 31                                                     2001             2000             1999
(In millions)                                                             -------           -------          -------
<S>                                                                       <C>               <C>              <C>
Sales volume:*
   Individual Life                                                        $   923           $   929          $   873
   Retirement Services                                                      1,562             1,723            2,270
   Long Term Care                                                             452               398              343
   Other Operations                                                            87               141              183
                                                                          -------           -------          -------

TOTAL                                                                     $ 3,024           $ 3,191          $ 3,669
                                                                          =======           =======          =======

Net earned premiums                                                       $   954           $   876          $   936
Net investment income                                                         618               620              561
Other revenues                                                                200               192              123
                                                                          -------           -------          -------

   Total operating revenues                                                 1,772             1,688            1,620

Benefits                                                                    1,283             1,104            1,122
Expenses                                                                      320               311              277
Restructuring and other related charges                                        70                 -                -
                                                                          -------           -------          -------

  Pretax operating income                                                      99               273              221

Income tax expense                                                            (33)              (92)             (73)
                                                                          -------           -------          -------

NET OPERATING INCOME                                                      $    66           $   181          $   148
                                                                          =======           =======          =======
</TABLE>

*Sales volume is a cash-based measure that includes premiums and annuity
considerations, investment contract deposits and other sales activities that are
not reported as premiums under GAAP.

2001 COMPARED WITH 2000

Net operating income decreased by $115 million in 2001 as compared with 2000.
This decrease relates primarily to restructuring and other related charges of
$45 million, decreased net investment income from limited partnerships of $22
million, estimated losses related to the WTC event of $14 million and adverse
mortality experience in the viatical settlement business of $10 million.
Included in the restructuring and other related charges was a $23 million
write-off of deferred acquisition costs on in-force variable life and annuity
contracts as the Company believes that its decision to discontinue these
products will negatively impact the persistency of the business.

Sales volume for Life Operations decreased by $167 million in 2001 as compared
with 2000. This decline was driven primarily by declines in the sales of
variable annuities and as a result of the decision to cease purchasing new
viatical policies. These declines were partially offset by increased renewals
and increased new sales in Long Term Care products. Net earned premiums
increased $78 million in 2001 as compared with 2000. This improvement is
attributable primarily to improved sales of structured settlements due to
favorable pricing conditions and Long Term Care products, partially offset by a
decrease in new Individual Life business.

2000 COMPARED WITH 1999

Net operating income increased $33 million in 2000 as compared with 1999. This
increase was attributable principally to increased earnings in the Index 500
product, the continued growth of Individual Life insurance in-force, favorable
investment results in Individual Life and Retirement Services and increased
income from limited partnerships of $9 million.



                                       32
<PAGE>

Sales volume for Life Operations declined $478 million in 2000 as compared with
1999. Sales volume decreased because of a reduction in Retirement Services
products sold to institutions. These products tend to be "large case"
institutional markets sales, which can be sporadic, opportunistic and sensitive
to independent agency ratings. Despite the overall decline, Life Operations'
competitively priced product portfolio enabled most of its businesses to
experience growth in 2000. Individual Life and Long Term Care products had an
increasing base of direct premiums, and variable investment contracts
experienced growth of $270 million to reach an annual sales level of $380
million in 2000. Net earned premiums declined $60 million in 2000 as compared
with 1999. This decline was attributable primarily to sales declines in
structured settlements and single premium group annuities due to a competitive
pricing environment. These declines were partially offset by a growing in-force
block of Long Term Care and annuity products.

CORPORATE AND OTHER

BUSINESS OVERVIEW

The Corporate and Other segment is principally comprised of Personal Insurance,
losses and expenses related to the centralized adjusting and settlement of APMT
claims, certain run-off insurance operations and other operations.

On October 1, 1999, certain CNA subsidiaries completed a transaction with The
Allstate Corporation (Allstate) to transfer substantially all of CNA's Personal
Insurance lines of business. See Note P to the Consolidated Financial Statements
for discussion of the Personal Insurance transaction.

APMT consists of the losses and expenses related to the centralized adjusting
and settlement of APMT claims that were formerly included in the
property-casualty segments. See the Environmental Pollution and Other Mass Tort
and Asbestos Reserves section on the following pages for a description of APMT
reserves.

Run-off Insurance Operations consists of entertainment insurance, agriculture
insurance and other financial lines as well as the direct financial guarantee
business underwritten by CNA's insurance affiliates and other insurance run-off
operations.

Other operations include interest expense on corporate borrowings, asbestos
claims related to Fibreboard Corporation, eBusiness initiatives, CNA UniSource
and inter-company eliminations. CNA UniSource provides human resources,
information technology, payroll processing and professional employer
organization services.


                                       33
<PAGE>


The following table details operating results for the Corporate and Other
segment.

OPERATING RESULTS

<TABLE>
<CAPTION>
Years ended December 31                                                      2001          2000        1999
(In millions)                                                               -------      -------      -------
<S>                                                                         <C>          <C>          <C>
Net earned premiums                                                         $     5      $    42      $ 1,463
Net investment income                                                           132          172          245
Other revenues                                                                  156          183          267
                                                                            -------      -------      -------

   Total operating revenues                                                     293          397        1,975
                                                                            -------      -------      -------

Claims, benefits and insurance related expenses                               1,268           71        1,890
Other expenses                                                                  443          579          651
Restructuring and other related charges                                         119            -            9
                                                                            -------      -------      -------

  Pretax operating loss                                                      (1,537)        (253)        (575)

Income tax benefit                                                              503           95          231
Minority Interest                                                                 -           (4)          (2)
                                                                            -------      -------      -------

NET OPERATING LOSS                                                          $(1,034)     $  (162)     $  (346)
                                                                            =======      =======      =======
</TABLE>


2001 COMPARED WITH 2000

Net operating results declined $872 million in 2001 as compared with 2000. The
after-tax impact of the second quarter 2001 reserve strengthening on the
Corporate and Other segment was $799 million, including $741 million for APMT.
See the Environmental Pollution and Other Mass Tort and Asbestos Reserves
section following for a discussion of this charge. Net operating income for 2001
also decreased by $77 million for restructuring and other related charges, $45
million for non-recurring ceding commissions included in 2000 results related to
the transfer of the Personal Insurance line of business to Allstate in 1999, $35
million related to increased eBusiness initiatives in 2001 and $13 million due
to decreased limited partnership income. These declines were partially offset by
lower interest expense on corporate borrowings in 2001 as compared with 2000 and
a non-recurring favorable adjustment of expense recoveries under a service
contract related to Personal Insurance.

Total operating revenues decreased $104 million in 2001 as compared with 2000.
This decline was due to a decrease in net investment income and net earned
premiums from run-off insurance operations, particularly the entertainment and
agriculture insurance lines.

2000 COMPARED WITH 1999

Net operating results improved $184 million for 2000 as compared with 1999. This
improvement is due to lower adverse development related to asbestos claims in
2000 as compared with 1999 and improvements in Personal Insurance including $45
million for the non-recurring ceding commission in 2000 as compared with $33
million in 1999, partially offset by expenses for CNA's eBusiness initiatives.

Total operating revenues decreased $1,578 million in 2000 as compared with 1999.
This decline is driven primarily by a $1,421 million decrease in net earned
premiums attributable primarily to the sale of Personal Insurance to Allstate in
1999. Net earned premiums for 1999 include $1,354 million of premiums related to
Personal Insurance. The remaining decline in net earned premiums is primarily a
result of CNA exiting the entertainment insurance and other




                                       34
<PAGE>

financial lines of business. Additionally, operating revenues declined as a
result of decreased net investment income.

ENVIRONMENTAL POLLUTION AND OTHER MASS TORT AND ASBESTOS RESERVES

CNA's property-casualty insurance subsidiaries have potential exposures related
to APMT claims.

Environmental pollution cleanup is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to cleanup. The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial interpretations in many cases have expanded
the scope of coverage and liability beyond the original intent of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of 1980
(Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup
and restoration of toxic waste sites and formalize the concept of legal
liability for cleanup and restoration by "Potentially Responsible Parties"
(PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for
cleanup of waste sites if PRPs fail to do so, and to assign liability to PRPs.
The extent of liability to be allocated to a PRP is dependent upon a variety of
factors. Further, the number of waste sites subject to cleanup is unknown. To
date, approximately 1,500 cleanup sites have been identified by the
Environmental Protection Agency (EPA) and included on its National Priorities
List (NPL). State authorities have designated many cleanup sites as well.

Many policyholders have made claims against various CNA insurance subsidiaries
for defense costs and indemnification in connection with environmental pollution
matters. These claims relate to accident years 1989 and prior, which coincides
with CNA's adoption of the Simplified Commercial General Liability coverage
form, which includes what is referred to in the industry as an "absolute
pollution exclusion." CNA and the insurance industry are disputing coverage for
many such claims. Key coverage issues include whether cleanup costs are
considered damages under the policies, trigger of coverage, allocation of
liability among triggered policies, applicability of pollution exclusions and
owned property exclusions, the potential for joint and several liability and the
definition of an occurrence. To date, courts have been inconsistent in their
rulings on these issues.

A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress during 2001, and it is unclear what
positions Congress or the administration will take and what legislation, if any,
will result in the future. If there is legislation, and in some circumstances
even if there is no legislation, the federal role in environmental cleanup may
be significantly reduced in favor of state action. Substantial changes in the
federal statute or the activity of the EPA may cause states to reconsider their
environmental cleanup statutes and regulations. There can be no meaningful
prediction of the pattern of regulation that would result or the effect upon
CNA's results of operations and/or financial position.

Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to cleanup, and the
standards for cleanup and liability, the ultimate liability of CNA for
environmental pollution claims may vary substantially from the amount currently
recorded.

As of December 31, 2001 and 2000, CNA carried approximately $617 million and
$347 million of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and other mass
tort claims. Unfavorable environmental pollution and other mass tort net claim
and claim adjustment expense reserve development for the years ended December
31, 2001 and 2000 amounted to $473 million and $17 million.




                                       35
<PAGE>

Favorable environmental pollution and other mass tort net claim and claim
adjustment expense reserve development for the year ended December 31, 1999
amounted to $84 million. The Company made environmental pollution-related claim
payments and other mass tort-related claim payments, net of reinsurance
recoveries, of $203 million, $135 million and $236 million during the years
ended December 31, 2001, 2000 and 1999.

The reserve development during 2001 for environmental pollution and other mass
tort reserves was due to reviews completed during the year, which indicated that
paid and reported losses were higher than expectations based on prior reviews.
Factors that have led to this development include a number of declaratory
judgments filed this year due to an increasingly favorable legal environment for
policyholders in certain courts and other unfavorable decisions regarding
cleanup issues.

CNA's property-casualty insurance subsidiaries also have exposure to
asbestos-related claims. Estimation of asbestos-related claim and claim
adjustment expense reserves involves many of the same limitations discussed
above for environmental pollution claims, such as inconsistency of court
decisions, specific policy provisions, allocation of liability among insurers
and insureds, and additional factors such as missing policies and proof of
coverage. Furthermore, estimation of asbestos-related claims is difficult due
to, among other reasons, the proliferation of bankruptcy proceedings and
attendant uncertainties, the targeting of a broader range of businesses and
entities as defendants, the uncertainty as to which other insureds may be
targeted in the future and the uncertainties inherent in predicting the number
of future claims.

As of December 31, 2001 and 2000, CNA carried approximately $1,204 million and
$603 million of net claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported asbestos-related claims.
Unfavorable asbestos-related net claim and claim adjustment expense reserve
development for the years ended December 31, 2001, 2000 and 1999 amounted to
$772 million, $65 million and $560 million. The Company made asbestos-related
claim payments, net of reinsurance, of $171 million, $126 million and $161
million during the years ended December 31, 2001, 2000 and 1999, excluding
payments made in connection with the 1993 settlement of litigation related to
Fibreboard Corporation. CNA has attempted to manage its asbestos-related
exposures by aggressively resolving old accounts.

The reserve development during 2001 for asbestos-related claims was based on a
management review of developments with respect to these exposures conducted
during the year. This analysis indicated a significant increase in claim counts
for asbestos-related claims. The factors that have led to the deterioration in
claim counts include, among other things, intensive advertising campaigns by
lawyers for asbestos claimants and the addition of new defendants such as the
distributors and installers of products containing asbestos. New claim filings
increased significantly in 2000 over 1999, and that trend continued during 2001.
The volume of new claims has caused the bankruptcies of numerous asbestos
defendants. Those bankruptcies also may result in increased liability for
remaining defendants under principles of joint and several liability.

In addition, some asbestos-related defendants have asserted that their claims
for insurance are not subject to aggregate limits on coverage. CNA currently has
such claims from a number of insureds. Some of these claims involve insureds
facing exhaustion of products liability aggregate limits in their policies, who
have asserted that their asbestos-related claims fall within so-called
"non-products" liability coverage contained within their policies rather than
products liability coverage, and that the claimed "non-products" coverage is not
subject to any aggregate limit. It is difficult to predict the ultimate size of
any of the claims for coverage not subject to aggregate limits or predict to
what extent, if any, the attempts to assert "non-products" claims outside the
products liability aggregate will succeed.



                                       36
<PAGE>

Due to the uncertainties created by volatility in claim numbers and settlement
demands, the effect of bankruptcies, the extent to which non-impaired claimants
can be precluded from making claims and the efforts by insureds to obtain
coverage not subject to aggregate limits, the ultimate liability of CNA for
asbestos-related claims may vary substantially from the amount currently
recorded. Other variables that will influence CNA's ultimate exposure to
asbestos-related claims include medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix of
asbestos-related diseases presented and the possibility of legislative reform.
Adverse developments with respect to such matters discussed herein could have a
material adverse effect on CNA's results of operations and/or financial
condition.

The results of operations and financial condition of CNA in future years may
continue to be adversely affected by environmental pollution and other mass tort
and asbestos claim and claim adjustment expenses. Management will continue to
review and monitor these liabilities and make further adjustments, including the
potential for further reserve strengthening, as warranted.

INVESTMENTS

The components of net investment income for the years ended December 31, 2001,
2000 and 1999 are presented in the following table.

NET INVESTMENT INCOME

<TABLE>
<CAPTION>
Years ended December 31                                                       2001            2000           1999
(In millions)                                                               -------         -------         -------
<S>                                                                         <C>             <C>             <C>
Fixed maturity securities:
   Bonds:
    Taxable                                                                 $ 1,742         $ 1,549         $ 1,509
    Tax-exempt                                                                  112             216             267
   Redeemable preferred stocks                                                    1               1               -
Limited partnerships                                                             47             293             115
Equity securities                                                                39              52              36
Mortgage loans and real estate                                                    2               4               4
Policy loans                                                                     12              12              11
Short-term investments                                                          135             201             188
Securities lending transactions, net                                             29              22              25
Other, including interest on funds withheld and other
  deposits                                                                     (164)            (16)             80
                                                                            -------         -------         -------

Gross investment income                                                       1,955           2,334           2,235
Investment expense                                                              (58)            (48)            (41)
                                                                            -------         -------         -------

NET INVESTMENT INCOME                                                       $ 1,897         $ 2,286         $ 2,194
                                                                            =======         =======         =======
</TABLE>

During 2001, the Company reclassified equity method income from limited
partnership investments. Effective in 2001, equity method income from limited
partnership investments is classified in net investment income and amounts in
2000 and 1999 have been reclassified to conform to the new presentation. This
income was previously classified in realized investment gains, net of
participating policyholders' and minority interests. Income from limited
partnership investments decreased $246 million for 2001 compared with 2000 and
increased $178 million for 2000 compared with 1999. During 2000 market
conditions allowed for favorable investment results relative to the investment
strategies of certain limited partnerships held. In addition, certain
partnerships that were very successful during 2000 have been dissolved and are
no longer held. Investment results for the same periods in 2001 were, in
general, less than expected.



                                       37
<PAGE>

The Company's reinsurance program includes certain property-casualty contracts,
such as the corporate aggregate treaties, that are entered into and accounted
for on a funds withheld basis. Under these contracts, the Company records a
funds withheld liability for substantially all of the ceded premiums. The
reinsurance contract requires the Company to increase the funds withheld balance
at a defined interest-crediting rate. The funds withheld liability is reduced by
any cumulative claim payments made by the Company in excess of the Company's
retention under the reinsurance contract. If the funds withheld liability is
exhausted, additional claim payments are recoverable from the reinsurer.

During 2001, the Company reclassified interest on funds withheld and other
deposits. This expense was previously classified in other operating expenses and
is now classified in net investment income. Interest on funds withheld and other
deposits was $241 million in 2001, $87 million in 2000 and $22 million in 1999.

The amount subject to interest crediting rates on such contracts was $2,724
million and $522 million at December 31, 2001 and 2000.

The Company experienced lower net investment income in 2001 as compared with
2000 due primarily to the decrease in limited partnership income as well as the
increase in interest on funds withheld and other deposits. Net investment income
increased in 2000 as compared with 1999 principally as a result of an increase
in limited partnership income, partially offset by an increase in interest
expense on funds withheld and other deposits. The bond segment of the investment
portfolio yielded 6.4% in 2001, 6.7% in 2000 and 6.1% in 1999.

The components of net realized investment gains (losses) for the years ended
December 31, 2001, 2000 and 1999 are presented in the following table.

NET REALIZED INVESTMENT GAINS

<TABLE>
<CAPTION>
Years ended December 31                                                       2001           2000            1999
(In millions)                                                               -------         -------         -------
<S>                                                                        <C>             <C>             <C>
Fixed maturity securities:
  U.S. Government bonds                                                     $   233         $    96         $  (177)
  Corporate and other taxable securities                                         (4)           (171)            (78)
  Tax-exempt bonds                                                               54              13             (44)
  Asset-backed bonds                                                             76             (65)            (13)
  Other                                                                         (21)             (3)              1
                                                                            -------         -------         -------

    Total fixed maturity securities                                             338            (130)           (311)

Equity securities                                                             1,096           1,116             366
Other realized investment (losses) gains                                       (154)             46             138
                                                                            -------         -------         -------

    Total realized investment gains                                           1,280           1,032             193

Allocated to participating policyholders' and
minority interests                                                              (15)             (4)              7
Income tax expense                                                             (447)           (358)            (84)
                                                                            -------         -------         -------

NET REALIZED INVESTMENT GAINS                                               $   818         $   670         $   116
                                                                            =======         =======         =======
</TABLE>



Net realized investment gains increased $148 million in 2001 as compared with
2000. This increase was due primarily to after-tax gains from closing the hedge
agreements, which were entered into during March 2000, related to the Company's
investment in Global Crossing Ltd. Common Stock (Global Crossing), of $647
million in 2001 as compared with $315 million in 2000 as well as gains of $58
million, resulting from the sale of a New York real estate property and gains
from the sale of fixed maturity security investments. This improvement was
partially offset by estimated losses recorded for the planned dispositions of
certain operations, principally CNA Re's U.K. subsidiaries described in more
detail below as well as decreases in




                                       38
<PAGE>

after-tax gains from the sale of Canary Wharf Group plc common stock (Canary
Wharf) of $34 million in 2001 as compared with $289 million in 2000.

During the second quarter of 2001, the Company announced its intention to sell
certain subsidiaries. The assets being held for disposition include the U.K.
subsidiaries of CNA Re and certain other subsidiaries. Based upon the impairment
analyses, the Company anticipated that it would realize losses in connection
with those planned sales. In determining the anticipated loss from these sales,
the Company estimated the net realizable value of each subsidiary being held for
sale. An estimated after-tax loss of $320 million was initially recorded in the
second quarter of 2001 in connection with these planned dispositions. This loss
is reported in other realized investment losses.

The Company completed the sale of certain subsidiaries during the fourth quarter
of 2001 and updated its impairment analyses of subsidiaries still held for sale,
including the U.K. subsidiaries of CNA Re. The subsidiaries sold resulted in
after-tax realized losses of $38 million, all of which was previously recognized
as part of the initial impairment loss recorded during the second quarter of
2001. The updated impairment analyses indicated that the $320 million after-tax
realized loss recorded in the second quarter of 2001 should be reduced,
primarily because the net assets of CNA Re U.K. had been significantly
diminished by its operating losses in the second half of 2001. In addition, the
Company updated its estimate of disposal costs, including anticipated capital
contributions, to reflect changes in the planned structure of the anticipated
sale. These updated impairment analyses reduced the after-tax realized loss by
$173 million, including $160 million related to the U.K. subsidiaries of CNA
Re. The anticipated sale of the U.K. insurance subsidiaries will be subject to
regulatory approval and all anticipated sales are expected to be completed in
2002.

Net realized investment gains increased $554 million in 2000 as compared with
1999. This increase is related principally to after-tax realized gains from
Global Crossing and Canary Wharf. The increase in net realized gains for 2000 as
compared with 1999 was $171 million for Global Crossing and $209 million for
Canary Wharf. Additionally, a favorable change in market conditions contributed
to the results for the bond sector.

A primary objective in the management of the fixed maturity portfolio is to
maximize total return relative to underlying liabilities and respective
liquidity needs. In achieving this goal, assets may be sold to take advantage of
market conditions or other investment opportunities or credit and tax
considerations. This activity will produce realized gains and losses.

CNA classifies its fixed maturity securities (bonds and redeemable preferred
stocks) and its equity securities as available-for-sale, and as such, they are
carried at fair value. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity,
which are included in net investment income. Changes in fair value are reported
as a component of other comprehensive income. Investments are written down to
estimated fair value and losses are recognized in income when a decline in value
is determined to be other than temporary.

For asset-backed securities included in fixed maturity securities, the Company
recognizes income using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities. When estimates of
prepayments change, the effective yield is recalculated to reflect actual
payments to date and anticipated future payments. The net investment in the
securities is adjusted to the amount that would have existed had the new
effective yield been applied since the acquisition of the securities. Such
adjustments are reflected in net investment income.



                                       39
<PAGE>

Mortgage loans are carried at unpaid principal balances, including unamortized
premium or discount. Real estate is carried at depreciated cost. Policy loans
are carried at unpaid balances. Short-term investments are generally carried at
amortized cost, which approximates fair value.

Other invested assets include investments in limited partnerships and certain
derivative securities. The Company's limited partnership investments are
recorded at fair value and typically reflect a reporting lag of up to three
months. Fair value represents CNA's equity in the partnership's net assets as
determined by the General Partner.

Limited partnerships are a small portion of the Company's overall investment
portfolio. The majority of the limited partnerships invest in a substantial
number of securities that are readily marketable. The Company is a passive
investor and does not have influence over the management of these partnerships
that operate according to established guidelines and strategies. These
strategies may include the use of leverage and hedging techniques that
potentially introduce more volatility and risk to the partnerships.

Investments in derivative securities are carried at fair value with changes in
fair value reported as a component of realized gains or losses or other
comprehensive income, depending on its hedge designation.

The following table details the carrying value of CNA's general and separate
account investment portfolios as of the end of each of the last two years.

GENERAL AND SEPARATE ACCOUNT INVESTMENTS

<TABLE>
<CAPTION>
December 31                                                           2001                %                2000                %
(In millions)                                                        -------           -------            -------           -------
<S>                                                                  <C>               <C>                <C>               <C>
GENERAL ACCOUNT INVESTMENTS
Fixed maturity securities:
  Bonds:
    Taxable                                                          $26,396                74%           $23,249                64%
    Tax-exempt                                                         2,720                 8              3,349                 9
  Redeemable preferred stocks                                             48                 -                 54                 -
Equity securities:
  Common stocks                                                          996                 3              2,216                 6
  Non-redeemable preferred stocks                                        342                 1                196                 1
Mortgage loans and real estate                                            35                 -                 26                 -
Policy loans                                                             194                 -                193                 1
Other invested assets                                                  1,355                 4              1,116                 3
Short-term investment                                                  3,740                10              5,660                16
                                                                     -------           -------            -------           -------

TOTAL GENERAL ACCOUNT INVESTMENTS                                    $35,826               100%           $36,059               100%
                                                                     =======           =======            =======           =======

SEPARATE ACCOUNT INVESTMENTS
Fixed maturity securities:

  Taxable bonds                                                      $ 2,347                62%           $ 2,703                65%
Equity securities:
  Common stocks                                                          149                 4                212                 5
  Non-redeemable preferred stocks                                         12                 -                  3                 -
Other invested assets                                                    876                23                849                20
Short-term investments                                                   394                11                407                10
                                                                     -------           -------            -------           -------

TOTAL SEPARATE ACCOUNT INVESTMENTS                                   $ 3,778               100%           $ 4,174               100%
                                                                     =======           =======            =======           =======
</TABLE>

The Company's general and separate account investment portfolio consists
primarily of publicly traded government bonds, asset-backed securities,
mortgage-backed securities, municipal bonds and corporate bonds.



                                       40
<PAGE>
Approximately 53% and 57% of separate account investments at December 31, 2001
and 2000 are used to fund guaranteed investment contracts for which Continental
Assurance Company (CAC) and Valley Forge Life Insurance Company (VFL) guarantee
principal and a specified return to the contract holders (guaranteed investment
contracts). The duration of fixed maturity securities included in the guaranteed
investment contract portfolio is matched approximately with the corresponding
payout pattern of the liabilities of the guaranteed investment contracts.

The Company's investment policies for both the general and separate accounts
emphasize high credit quality and diversification by industry, issuer and issue.
Assets supporting interest rate-sensitive liabilities are segmented within the
general account to facilitate asset/liability duration management.

The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 92% and 93% of which were rated as investment grade at December
31, 2001 and 2000. The following table summarizes the ratings of CNA's general
account bond portfolio at carrying value.

GENERAL ACCOUNT BOND RATINGS

<TABLE>
<CAPTION>
December 31                                                    2001              %             2000              %
(In millions)                                            ----------------  -------------  --------------  --------------
<S>                                                      <C>               <C>            <C>             <C>
U.S. Government and affiliated agency securities               $  5,715              20%       $  8,689              32%
Other AAA rated                                                   9,204              32           7,120              27
AA and A rated                                                    6,127              21           5,954              22
BBB rated                                                         5,583              19           3,066              12
Below investment-grade                                            2,487               8           1,769               7
                                                         ----------------  -------------  --------------  --------------

TOTAL                                                          $ 29,116             100%       $ 26,598            100%
                                                         ================  =============  ==============  ==============
</TABLE>




The following table summarizes the bond ratings of the investments supporting
those separate account products, which guarantee principal and a specified rate
of interest.

<TABLE>
<CAPTION>
SEPARATE ACCOUNT BOND RATINGS
December 31                                                   2001               %             2000              %
(in millions)                                            ----------------  -------------  --------------  --------------
<S>                                                      <C>               <C>            <C>             <C>

U.S. Government and affiliated agency securities               $    214              10%        $   224              10%
Other AAA rated                                                   1,017              50           1,248              55
AA and A rated                                                      310              15             374              16
BBB rated                                                           421              21             397              17
Below investment-grade                                               77               4              49               2
                                                         ----------------  -------------  --------------  --------------

TOTAL                                                          $  2,039             100%       $  2,292             100%
                                                         ================  =============  ==============  ==============
</TABLE>




At December 31, 2001 and 2000, approximately 98% of the general account
portfolio was U.S. Government agencies or was rated by Standard & Poor's (S&P)
or Moody's Investors Service. Approximately 100% and 99% of the guaranteed
investment contract portfolio bonds were U.S. Government agencies or were rated
by S&P or Moody's Investors Service at December 31, 2001 and 2000. The remaining
bonds were rated by other rating agencies or Company management.

Below investment-grade bonds, as presented in the table above, are high-yield
securities rated below BBB by bond rating agencies, as well as other unrated
securities that, in the opinion of management, are below investment-grade.
High-yield securities generally involve a greater degree of risk than
investment-grade securities. However, expected returns should compensate for the
added risk. This risk is also considered in the interest rate assumptions for
the





                                       41
<PAGE>

underlying insurance products. CNA's concentration in high-yield bonds was
approximately 8% and 7% of the general account portfolio and 4% and 2% of the
guaranteed investment contract portion of CNA's separate account bond portfolio
as of December 31, 2001 and 2000.

Included in CNA's general account fixed maturity securities at December 31, 2001
are $7,723 million of asset-backed securities, at fair value, consisting of
approximately 69% in collateralized mortgage obligations (CMOs), 14% in
corporate asset-backed obligations, 13% in U.S. Government agency issued
pass-through certificates and 4% in corporate mortgage-backed pass-through
certificates. The majority of CMOs held are actively traded in liquid markets
and are priced by broker-dealers.

Short-term investments at December 31, 2001 and 2000 consisted primarily of
commercial paper and money market funds. The carrying value of the components of
the general account short-term investment portfolio is presented in the
following table.

SHORT-TERM INVESTMENTS

<TABLE>
<CAPTION>
December 31                                                                                 2001               2000
(In millions)                                                                          --------------    --------------
<S>                                                                                    <C>               <C>

Commercial paper                                                                          $  1,194           $  3,291
U.S. Treasury securities                                                                       175                383
Money market funds                                                                           1,641                620
Other                                                                                          730              1,366
                                                                                      --------------    --------------

TOTAL SHORT-TERM INVESTMENTS                                                              $  3,740           $  5,660
                                                                                      ==============    ==============
</TABLE>



CNA invests in certain derivative financial instruments primarily to reduce its
exposure to market risk (principally interest rate, equity price and foreign
currency risk). CNA considers the derivatives in its general account to be held
for purposes other than trading. Derivative securities are recorded at fair
value at the reporting date.

Most derivatives in separate accounts are held for hedging purposes. The Company
uses these derivatives to mitigate market risk by purchasing S&P 500(R) index
futures in a notional amount equal to the contract liability relating to Life
Operations' Index 500 guaranteed investment contract product.

MARKET RISK

Market risk is a broad term related to changes in the fair value of a financial
instrument. Discussions herein regarding market risk focus on only one element
of market risk - price risk. Price risk relates to changes in the level of
prices due to changes in interest rates, equity prices, foreign exchange rates
or other factors that relate to market volatility of the rate, index or price
underlying the financial instrument. The Company's primary market risk exposures
are due to changes in interest rates, although the Company has certain exposures
to changes in equity prices and foreign currency exchange rates. The fair value
of the financial instruments is adversely affected when interest rates rise,
equity markets decline and the dollar strengthens against foreign currency.

Active management of market risk is integral to the Company's operations. The
Company may use the following tools to manage its exposure to market risk within
defined tolerance ranges: 1) change the character of future investments
purchased or sold: 2) use derivatives to offset the market behavior of existing
assets and liabilities or assets expected to be purchased and liabilities to be
incurred; or 3) rebalance its existing asset and liability portfolios.



                                       42
<PAGE>

For purposes of this disclosure, market risk-sensitive instruments are divided
into two categories: 1) instruments entered into for trading purposes; and 2)
instruments entered into for purposes other than trading. The Company's general
account market risk-sensitive instruments are classified as held for purposes
other than trading.

SENSITIVITY ANALYSIS

CNA monitors its sensitivity to interest rate risk by evaluating the change in
the value of financial assets and liabilities due to fluctuations in interest
rates. The evaluation is performed by applying an instantaneous change in
interest rates of varying magnitudes on a static balance sheet to determine the
effect such a change in rates would have on the Company's market value at risk
and the resulting effect on stockholders' equity. The analysis presents the
sensitivity of the market value of the Company's financial instruments to
selected changes in market rates and prices. The range of change chosen reflects
the Company's view of changes that are reasonably possible over a one-year
period. The selection of the range of values chosen to represent changes in
interest rates should not be construed as the Company's prediction of future
market events, but rather as an illustration of the impact of such events.

The sensitivity analysis estimates the decline in the market value of the
Company's interest-sensitive assets and liabilities that were held on December
31, 2001 and 2000 due to instantaneous parallel increases in the period-end
yield curve of 100 and 150 basis points. The sensitivity analysis also assumes
an instantaneous 10% and 20% decline in the foreign currency exchange rates
versus the U.S. dollar from their levels at December 31, 2001 and 2000, with
all other variables held constant.

Equity price risk was measured assuming an instantaneous 10% and 25% decline in
the S&P 500 Index (Index) from its level at December 31, 2001 and 2000 with all
other variables held constant. The Company's equity holdings were assumed to be
highly and positively correlated with the Index. At December 31, 2001, a 10% and
25% decrease in the Index would result in a $366 million and $914 million
decrease compared to $457 million and $1,042 million decrease at December 31,
2000 in the market rate of the Company's equity investments.

Of these amounts, under the 10% and 25% scenarios, $163 million and $407 million
at December 31, 2001 and $167 million and $418 million at December 31, 2000
pertained to decreases in the market value of the separate account investments.
These decreases would be substantially offset by decreases in related separate
account liabilities to customers. Similarly, increases in the market value of
the separate account equity investments would also be offset by increases in the
same related separate account liabilities by the same approximate amounts.

The following tables present the estimated effects on the market value of the
Company's financial instruments at December 31, 2001 and 2000, due to an
increase in interest rates of 100 basis points, a decline of 10% in foreign
currency exchange rates and a 10% decline in the Index.


                                       43
<PAGE>

<TABLE>
<CAPTION>

MARKET RISK SCENARIO 1                                                                        INCREASE (DECREASE)
                                                                                  ------------------------------------------
                                                                       MARKET       INTEREST       CURRENCY        EQUITY
December 31, 2001                                                       VALUE       RATE RISK        RISK           RISK
(In millions)                                                       ------------- -------------- -------------- ------------

<S>                                                                 <C>           <C>            <C>            <C>
HELD FOR OTHER THAN TRADING PURPOSES
General account:
  Fixed maturity securities                                            $29,164       $(1,500)       $   (38)       $   (20)
  Equity securities                                                      1,338             -            (23)          (129)
  Short-term investments                                                 3,740            (1)           (14)             -
  Limited partnerships                                                   1,307            51              -            (54)
  Other invested assets                                                    258             -              -              -
  Interest rate caps                                                         2             2              -              -
  Interest rate swaps                                                        3            (9)             -              -
  Other derivative securities                                               14           (12)            18              -
                                                                       -------       -------        -------        -------

    Total general account                                               35,826        (1,469)           (57)          (203)
                                                                       -------       -------        -------        -------

Separate accounts:
  Fixed maturity securities                                              2,039          (120)             -              -
  Equity securities                                                        149             -              -            (15)
  Short-term investments                                                    98             -              -              -
  Other invested assets                                                    533             -              -            (53)
                                                                       -------       -------        -------        -------

    Total separate accounts                                              2,819          (120)             -            (68)
                                                                       -------       -------        -------        -------

Total all securities held for other than trading purposes               38,645        (1,589)           (57)          (271)
                                                                       -------       -------        -------        -------

HELD FOR TRADING PURPOSES
Separate accounts:
  Fixed maturity securities                                                308            (5)             -             (5)
  Equity securities                                                         12             -              -             (1)
  Short-term investments                                                   296             -              -              -
  Limited partnerships                                                     342             -              -             (2)
  Equity indexed futures                                                     -             2              -            (87)
  Other derivative securities                                                1             1              -              -
                                                                       -------       -------        -------        -------

Total all securities held for trading purposes                             959            (2)             -            (95)
                                                                       -------       -------        -------        -------

TOTAL ALL SECURITIES                                                   $39,604       $(1,591)       $   (57)       $  (366)
                                                                       =======       =======        =======        =======

DEBT (CARRYING VALUE)                                                  $ 2,567       $  (104)       $     -        $     -
                                                                       =======       =======        =======        =======
</TABLE>






                                       44
<PAGE>

<TABLE>
<CAPTION>
MARKET RISK SCENARIO 1                                                                        INCREASE (DECREASE)
                                                                                  --------------------------------------------
                                                                      MARKET        INTEREST       CURRENCY        EQUITY
December 31, 2000                                                      VALUE        RATE RISK        RISK           RISK
(In millions)                                                      -------------- -------------- -------------- --------------
<S>                                                                <C>            <C>            <C>            <C>
HELD FOR OTHER THAN TRADING PURPOSES
General account:
  Fixed maturity securities                                           $26,652       $(1,428)       $  (213)       $   (22)
  Equity securities                                                     2,412             -            (44)          (223)
  Short-term investments                                                5,660            (5)           (18)             -
  Limited partnerships                                                  1,092            43              -            (45)
  Other invested assets                                                   241             -              -              -
  Interest rate caps                                                        1             1              -              -
  Other derivative securities                                               1             1             (4)             -
                                                                      -------       -------        -------        -------

    Total general account                                              36,059        (1,388)          (279)          (290)
                                                                      -------       -------        -------        -------

Separate accounts:
  Fixed maturity securities                                             2,293          (118)            (7)             -
  Equity securities                                                       212             -             (1)           (21)
  Short-term investments                                                  177             -              -              -
  Other invested assets                                                   444             -              -            (44)
                                                                      -------       -------        -------        -------

    Total separate accounts                                             3,126          (118)            (8)           (65)
                                                                      -------       -------        -------        -------

Total all securities held for other than trading purposes              39,185        (1,506)          (287)          (355)
                                                                      -------       -------        -------        -------

HELD FOR TRADING PURPOSES
Separate accounts:
  Fixed maturity securities                                               410           (19)            (4)            (1)
  Equity securities                                                         3             -              -              -
  Short-term investments                                                  230             -              -              -
  Limited partnerships                                                    404             -              -             (3)
  Equity indexed futures                                                    -             2              -            (98)
  Other derivative securities                                               1            (6)             -              -
                                                                      -------       -------        -------        -------

Total all securities held for trading purposes                          1,048           (23)            (4)          (102)
                                                                      -------       -------        -------        -------

TOTAL ALL SECURITIES                                                  $40,233       $(1,529)       $  (291)       $  (457)
                                                                      =======       =======        =======        =======

DEBT (CARRYING VALUE)                                                 $ 2,729       $  (114)       $     -        $     -
                                                                      =======       =======        =======        =======
</TABLE>







                                       45
<PAGE>

The following tables present the estimated effects on the market value of the
Company's financial instruments at December 31, 2001 and 2000, due to an
increase in interest rates of 150 basis points, a decline of 20% in foreign
currency exchange rates and a 25% decline in the Index.

<TABLE>
<CAPTION>
MARKET RISK SCENARIO 2                                                                    INCREASE (DECREASE)
                                                                              --------------------------------------------
                                                                  MARKET        INTEREST       CURRENCY        EQUITY
December 31, 2001                                                  VALUE        RATE RISK        RISK           RISK
(In millions)                                                  -------------- -------------- -------------- --------------
<S>                                                            <C>            <C>            <C>            <C>
HELD FOR OTHER THAN TRADING PURPOSES
General account:
  Fixed maturity securities                                       $29,164       $(2,203)       $   (75)       $   (51)
  Equity securities                                                 1,338             -            (47)          (322)
  Short-term investments                                            3,740            (1)           (28)             -
  Limited partnerships                                              1,307            77              -           (134)
  Other invested assets                                               258             -              -              -
  Interest rate caps                                                    2             3              -              -
  Interest rate swaps                                                   3           (14)             -              -
  Other derivative securities                                          14           (17)            36              -
                                                                  -------       -------        -------        -------

    Total general account                                          35,826        (2,155)          (114)          (507)
                                                                  -------       -------        -------        -------

Separate accounts:
  Fixed maturity securities                                         2,039          (176)             -              -
  Equity securities                                                   149             -              -            (37)
  Short-term investments                                               98             -              -              -
  Other invested assets                                               533             -              -           (133)
                                                                  -------       -------        -------        -------

    Total separate accounts                                         2,819          (176)             -           (170)
                                                                  -------       -------        -------        -------

Total all securities held for other than trading purposes          38,645        (2,331)          (114)          (677)
                                                                  -------       -------        -------        -------

HELD FOR TRADING PURPOSES
Separate accounts:
  Fixed maturity securities                                           308            (7)             -            (12)
  Equity securities                                                    12             -              -             (2)
  Short-term investments                                              296             -              -              -
  Limited partnerships                                                342             -              -             (6)
  Equity indexed futures                                                -             3              -           (217)
  Other derivative securities                                           1             2              -              -
                                                                  -------       -------        -------        -------

Total all securities held for trading purposes                        959            (2)             -           (237)
                                                                  -------       -------        -------        -------

TOTAL ALL SECURITIES                                              $39,604       $(2,333)       $  (114)       $  (914)
                                                                  =======       =======        =======        =======

DEBT (CARRYING VALUE)                                             $ 2,567       $  (151)       $     -        $     -
                                                                  =======       =======        =======        =======
</TABLE>







                                       46
<PAGE>

<TABLE>
<CAPTION>
MARKET RISK SCENARIO 2                                                                          INCREASE (DECREASE)
                                                                                    --------------------------------------------
                                                                        MARKET        INTEREST       CURRENCY        EQUITY
December 31, 2000                                                        VALUE        RATE RISK        RISK           RISK
(In millions)                                                        -------------- -------------- -------------- --------------
<S>                                                                  <C>            <C>            <C>            <C>
HELD FOR OTHER THAN TRADING PURPOSES
General account:
  Fixed maturity securities                                             $26,652       $(2,180)       $  (427)       $   (56)
  Equity securities                                                       2,412             -            (88)          (456)
  Short-term investments                                                  5,660            (8)           (36)             -
  Limited partnerships                                                    1,092            65              -           (112)
  Other invested assets                                                     241             -              -              -
  Interest rate caps                                                          1             2              -              -
  Interest rate swaps                                                         -            (1)             -              -
  Other derivative securities                                                 1             1             (7)             -
                                                                        -------       -------        -------        -------

    Total general account                                                36,059        (2,121)          (558)          (624)
                                                                        -------       -------        -------        -------

Separate accounts:
  Fixed maturity securities                                               2,293          (171)           (15)             -
  Equity securities                                                         212             -             (1)           (53)
  Short-term investments                                                    177             -              -              -
  Other invested assets                                                     444             -              -           (111)
                                                                        -------       -------        -------        -------

    Total separate accounts                                               3,126          (171)           (16)          (164)
                                                                        -------       -------        -------        -------

Total all securities held for other than trading purposes                39,185        (2,292)          (574)          (788)
                                                                        -------       -------        -------        -------

HELD FOR TRADING PURPOSES
Separate accounts:
  Fixed maturity securities                                                 410           (28)            (7)            (1)
  Equity securities                                                           3             -              -             (1)
  Short-term investments                                                    230             -              -              -
  Limited partnerships                                                      404             -              -             (7)
  Equity indexed futures                                                      -             3              -           (245)
  Other derivative securities                                                 1            (9)             -              -
                                                                        -------       -------        -------        -------

Total all securities held for trading purposes                            1,048           (34)            (7)          (254)
                                                                        -------       -------        -------        -------

TOTAL ALL SECURITIES                                                    $40,233       $(2,326)       $  (581)       $(1,042)
                                                                        =======       =======        =======        =======

DEBT (CARRYING VALUE)                                                   $ 2,729       $  (166)       $     -        $     -
                                                                        =======       =======        =======        =======
</TABLE>



LIQUIDITY AND CAPITAL RESOURCES

The principal operating cash flow sources of CNA's property-casualty and life
insurance subsidiaries are premiums and investment income. The primary operating
cash flow uses are payments for claims, policy benefits and operating expenses.

For the year ended December 31, 2001, net cash used in operating activities was
$599 million as compared with $1,345 million in 2000. The improvement related
primarily to decreased paid claims.

For the year ended December 31, 2000, net cash used for operating activities was
$1,345 million as compared with net cash used of $2,823 million in 1999. The
improvement in 2000 relates primarily to significant outflows in 1999 of: 1)
$1.1 billion in cash to Allstate in connection with the transaction involving
the Company's Personal Insurance business; and 2) $1.1 billion of claim payments
from escrow pursuant to the Fibreboard settlement. See Note P to the
Consolidated Financial Statements for discussion of the Personal Insurance
transaction. Excluding these significant, non-recurring transactions from 1999,
the Company's 2000 cash outflows from operations declined by approximately $600
million to an outflow of approximately




                                       47
<PAGE>

$1.4 billion. The operating cash flows forgone in 2000 due to the transfer of
Personal Insurance in 1999 was approximately $250 million. The remainder of the
decline related primarily to increased payments of claims and decreased receipts
of premiums.

Cash flows from investing activities include purchases and sales of financial
instruments, as well as the purchase and sale of land, buildings, equipment and
other assets not generally held for resale.

For the year ended December 31, 2001, net cash used for investing activities was
$205 million as compared with net cash inflows of $1,842 million in 2000. Cash
flows for investing activities were related principally to increased net
purchases of invested assets related to investing $1 billion of proceeds from
the common stock rights offering completed in the third quarter of 2001.

For the year ended December 31, 2000, net cash inflows from investment
activities were $1,842 million as compared with $3,317 million in 1999. Cash
flows from investing activities were particularly high in 1999 due to sales of
investments to fund the outflows related to the Personal Insurance transaction
and Fibreboard claim payments.

Cash flows from financing activities include proceeds from the issuance of debt
or equity securities, outflows for dividends or repayment of debt and outlays to
reacquire equity instruments. For the year ended December 31, 2001, net cash
provided from financing activities was $783 million as compared with $487
million of net cash used in 2000. CNA completed a common stock rights offering
on September 26, 2001, successfully raising $1 billion (40.3 million shares sold
at $25 per share). Loews purchased 38.3 million shares issued in connection with
the rights offering for $957 million, and an additional 0.8 million shares in
the open market, increasing its ownership percentage of CNA to 88.8%.
Additionally, CNAF borrowed $500 million against its bank credit facility.
Partially offsetting these cash inflows were reductions to the Company's
commercial paper borrowings of $627 million.

For the year ended December 31, 2000, net cash used for financing activities was
$487 million as compared with $558 million in 1999. During 2000 and 1999, cash
flows for financing activities included the repurchase of preferred and common
equity instruments, the retirement or repurchase of senior debt securities and
mortgages, the repayment of bank loans and the payment of preferred dividends.

The Company is closely managing the cash flows related to claims and reinsurance
recoverables from the WTC event. It is anticipated that significant claim
payments will be made prior to receipt of the corresponding reinsurance
recoverables. The Company does not anticipate any liquidity problems resulting
from these payments. As of March 1, 2002, the Company has paid $273 million in
claims and recovered $90 million from reinsurers.

CNA's estimated gross pretax losses for the WTC event were $1,648 million pretax
($1,071 million after-tax). Net pretax losses before the effect of the corporate
aggregate reinsurance treaties were $727 million. Approximately 41%, 40% and 17%
of the reinsurance recoverables on the estimated losses related to the WTC event
are from companies with S&P ratings of AAA, AA or A.

Effective January 30, 2001, the Company sold the 180 Maiden Lane, New York,
facility. The sale of this property provided additional liquidity to the Company
with net sale proceeds of $264 million.


                                       48
<PAGE>


The Company's long-term debt and capital lease obligations are composed of the
following.

DEBT

<TABLE>
<CAPTION>
December 31                                                                                 2001            2000
(In millions)                                                                          ------------    -------------
<S>                                                                                    <C>             <C>
Variable rate debt:
  Commercial Paper                                                                      $    -              $  627
  Credit facility - CNAF                                                                   500                   -
  Credit facility - CNA Surety                                                              75                 100
Senior notes - CNAF:

  7.250%,  due March 1, 2003                                                               133                 133
  6.250%,  due November 15, 2003                                                           250                 249
  6.500%,  due April 15, 2005                                                              491                 491
  6.750%,  due November 15, 2006                                                           249                 249
  6.450%,  due January 15, 2008                                                            149                 149
  6.600%,  due December 15, 2008                                                           199                 199
  8.375%,  due August 15, 2012                                                              68                  68
  6.950%,  due January 15, 2018                                                            148                 148
Debenture, 7.250%, due November 15, 2023 - CNAF                                            240                 240
Capital leases, 8.000%-19.980%, due through December 31, 2011                               38                  40
Other debt, 1.000%-8.500%, due through 2019                                                 27                  36
                                                                                        ------              ------

TOTAL DEBT                                                                              $2,567              $2,729
                                                                                        ======              ======
</TABLE>



The combined aggregate maturities for debt at December 31, 2001 are presented in
the following table.

MATURITY OF DEBT

(In millions)
<TABLE>
<S>                                                                                                 <C>
2002                                                                                                       $    329
2003                                                                                                            387
2004                                                                                                            254
2005                                                                                                            496
2006                                                                                                            254
Thereafter                                                                                                      859
Less original issue discount                                                                                   (12)
                                                                                                     ---------------

TOTAL                                                                                                      $  2,567
                                                                                                     ===============
</TABLE>




During 2001, the Company discontinued its commercial paper program and repaid
all loans outstanding under the program.

The funds used to retire the outstanding commercial paper debt were obtained
through the draw down of the full amount available under the Company's $500
million revolving credit facility. The facility is composed of two parts: a $250
million component with a 364-day expiration date (with an option enabling CNAF
to convert borrowings into a one-year term loan) and a $250 million component
with a three-year expiration date.

The Company pays a facility fee to the lenders for having funds available for
loans under both components of the facility; the fee varies based on the
long-term debt ratings of the Company. At December 31, 2001, the facility fee on
the 364-day component was 15 basis points and the facility fee on the three-year
component was 17.5 basis points.

                                       49
<PAGE>

In addition to the facility fees, the Company pays interest on any outstanding
debt/borrowings under the facility based on a rate determined using the
long-term debt ratings of the Company. The interest rate is equal to the London
Interbank Offering Rate (LIBOR) plus 60 basis points for the 364-day component
and LIBOR plus 57.5 basis points for the three-year component. Further, if the
Company has outstanding loans greater than 50% of the amounts available under
the facility, the Company will also pay a utilization fee of 12.5 basis points
on such loans.

A Moody's Investor Service (Moody's) downgrade of the CNAF senior debt rating
from Baa2 to Baa3 would increase the facility fee on the 364-day component of
the facility from 15 basis points to 20 basis points, and the facility fee on
the three-year component would increase from 17.5 basis points to 25 basis
points. The applicable interest rate on the 364-day component would increase
from LIBOR plus 60 basis points to LIBOR plus 80 basis points and the applicable
interest rate on the three-year component would increase from LIBOR plus 57.5
basis points to LIBOR plus 75 basis points. The utilization fee would remain
unchanged on both components at 12.5 basis points.

The $500 million revolving credit facility replaced CNAF's $750 million
revolving credit facility (the Prior Facility), which was scheduled to expire on
May 10, 2001. No loans were outstanding under the Prior Facility anytime during
2001 or at December 31, 2000. To offset the variable rate characteristics of the
Prior Facility and the interest rate risk associated with periodically reissuing
commercial paper, CNA was party to interest rate swap agreements with several
banks. While no agreements were entered into for the year ended December 31,
2001, there were agreements in place during 2000 and 1999. These agreements
required CNA to pay interest at a fixed rate in exchange for the receipt of the
three-month LIBOR. The effect of the interest rate swap agreements was to
decrease interest expense by approximately $2 million for the year ended
December 31, 2000 and increase interest expense by $4 million for the year ended
December 31, 1999.

The terms of CNA's credit facility requires the Company to maintain certain
financial ratios and combined property-casualty company statutory surplus
levels. At December 31, 2001 and 2000, CNA was in compliance with all
restrictive debt covenants.

Following the announcement of second quarter 2001 earnings, the Company's
commercial paper rating was placed under review by S&P. During the review
period, the Company, through an affiliated company, held varying amounts of its
commercial paper with the intent to put it back into the market after the review
was completed. On October 10, 2001, S&P lowered the Company's commercial paper
rating from A2 to A3 and maintained the CreditWatch Negative status. On December
28, 2001, Moody's lowered the long-term debt rating from Baa1 to Baa2 and
affirmed the P2 short-term debt rating.

The commercial paper rating downgrade, the impacts of the WTC event and an
overall decline in the market made it difficult to maintain a commercial paper
program. Following consultation with CNAF's commercial and investment bankers,
management determined that the most economical way to replace the commercial
paper was to draw on the revolving bank credit facility.

During 2000, CNA purchased a portion of its debt notes when opportunities arose.
These repurchases included approximately $24 million of The Continental
Corporation (Continental) senior notes and approximately $14 million of CNAF
senior notes. On August 2, 1999, the Company repaid its $157 million, 11%
Secured Mortgage Notes, due June 30, 2013.

On April 19, 1999, CNA filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission (SEC), which became effective, relating to
$549 million in senior and




                                       50
<PAGE>

subordinated debt, junior debt, common stock, preferred stock and warrants.

On April 15, 1999, the Company retired $100 million of Continental's 8.25%
senior notes.

In the normal course of business, CNA has obtained letters of credit in favor of
various unaffiliated insurance companies, regulatory authorities and other
entities. At December 31, 2001, there were approximately $270 million of
outstanding letters of credit, of which approximately $30 million was
collateralized with cash and securities.

The Company has committed approximately $152 million to future capital calls
from various third party limited partnership investments in exchange for an
ownership interest in the related partnerships.

The Company has a commitment to purchase a $100 million floating rate note
issued by the Californian Earthquake Authority in the event California
earthquake related insurance losses exceed $4.9 billion prior to December 31,
2002.

The Company has entered into a limited number of guaranteed payment contracts.
These relate primarily to telecom service contracts and amount to payments of
approximately $41 million guaranteed for 2002 through 2005. Additionally, the
Company is obligated to future payments totaling $596 million for non-cancelable
operating leases expiring from 2002 through 2014 primarily for office space and
data processing, office and transportation equipment.

Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. CNA's insurance company
subsidiaries are rated by major rating agencies, and these ratings reflect the
rating agency's opinion of the insurance company's financial strength, operating
performance, strategic position and ability to meet its obligations to
policyholders. Agency ratings are not a recommendation to buy, sell or hold any
security, and may be revised or withdrawn at any time by the issuing
organization. Each agency's rating should be evaluated independently of any
other agency's rating.

The table below reflects ratings issued by A.M. Best, S&P, Moody's and Fitch as
of February 13, 2002 for the CCC Pool, the Continental Insurance Company (CIC)
Pool and the CAC Pool. Also rated were CNAF's senior debt and commercial paper
and Continental senior debt.

<TABLE>
<CAPTION>
                                                                                       DEBT RATINGS
                                                                        --------------------------------------------
                                        INSURANCE RATINGS                           CNAF
                           -------------------------------------------- ----------------------------  CONTINENTAL
                             CCC POOL       CAC POOL       CIC POOL        SENIOR       COMMERCIAL       SENIOR
                                       FINANCIAL STRENGTH                   DEBT           PAPER          DEBT
                           -------------------------------------------- -------------- -----------------------------
<S>                        <C>         <C>                 <C>          <C>             <C>           <C>
A.M. Best                        A              A              A             BBB           AMB-2          BBB-
Fitch                            A             AA-            NR             BBB            NR             NR
Moody's                         A3             A2(Negative)*  A3             Baa2           P2            Baa3
S&P                              A-             A+             A-            BBB-           A3            BBB-
</TABLE>
NR = Not Rated

* CAC and Valley Forge Life Insurance Company (VFL) are rated separately by
  Moody's and both have an A2 rating.


On February 13, 2002, Fitch removed the rating watch negative status and
affirmed the insurance financial strength rating of CCC and the senior debt
rating of CNAF. On September 24, 2001, following the WTC event, Fitch affirmed
the ratings of CAC and placed CCC under review.

On February 1, 2002, S&P affirmed the debt and financial strength ratings of
CNAF and the CNA insurance companies. The outlook was changed from CreditWatch
Negative to stable. This action occurred after management's discussions with S&P
in early January, 2002 and upon




                                       51
<PAGE>

completion of their evaluation of additional information provided to them with
respect to the WTC event reserve estimate (including additional sensitivity
analyses of the reserve estimates) and other capital adequacy analyses.
Additionally, CNA and S&P-London have agreed to a guarantee of the Continental
Insurance Company of Europe (CIE)/Maritime Insurance Co., Ltd. liabilities by
CCC in order to maintain their present rating of "A-". This matter is expected
to be concluded by the second quarter of 2002, as the guarantee requires the
approval of the Illinois Department of Insurance (the Department).

On December 28, 2001, Moody's lowered the insurance financial strength rating of
the CCC Pool to "A3" (stable). In addition, Moody's lowered the CNAF long-term
debt and preferred stock ratings to "Baa2" and "Ba1," and the Continental senior
debt rating to "Baa3." The previously affirmed ratings of CIC, CAC and
commercial paper remained unchanged with the rating action. These rating actions
concluded the review begun on August 2, 2001 in connection with the second
quarter 2001 reserve strengthening. In light of subsequent events, management
further discussed with Moody's the WTC event and the fourth quarter
restructuring charge. All of these items were contemplated in their current
rating opinion and outlook.

CNAF held $275 million of Continental preferred shares. The $29 million annual
Continental preferred share dividend was funded by CIC. Although the capital
position of the CIC Pool remains strong, CIC's ability to dividend funds to its
parent Continental is limited by regulatory constraints. In order to alleviate
intercompany dividend requirements, the Continental preferred stock has been
converted to Continental common stock in the fourth quarter of 2001.

CNAF's ability to pay dividends and other credit obligations is significantly
dependent on receipt of dividends from its subsidiaries. The payment of
dividends to CNAF by its insurance subsidiaries without prior approval of the
insurance department of each subsidiary's domiciliary jurisdiction is limited by
formula. Dividends in excess of these amounts are subject to prior approval of
the respective state insurance departments.

Dividends from the CCC Pool are subject to the insurance holding company laws of
the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary
dividends, or dividends that do not require prior approval of the Department,
may be paid only from earned surplus, which is calculated by removing unrealized
gains (which under statutory accounting includes cumulative earnings of CCC's
subsidiaries) from unassigned surplus. As of December 31, 2001, CCC is in a
negative earned surplus position. In February 2002, the Department approved an
extraordinary dividend in the amount of $117 million to be used to fund CNAF's
2002 debt service requirements. Until CCC is in a positive earned surplus
position, all dividends require prior approval of the Department.

In addition, by agreement with the New Hampshire Insurance Department, as well
as certain other state insurance departments, dividend payments for the CIC Pool
are restricted to internal and external debt service requirements through
September 2003 up to a maximum of $85 million annually, without the prior
approval of the New Hampshire Insurance Department.

CRITICAL ACCOUNTING POLICIES

EARNED PREMIUMS: Insurance premiums on property-casualty and accident and health
insurance contracts are earned ratably over the duration of the policies after
deductions for ceded insurance. The reserve for unearned premiums on these
contracts represents the portion of premiums written relating to the unexpired
terms of coverage.

Property-casualty contracts that are retrospectively rated contain contract
provisions that result in an adjustment to the initial policy premium depending
on the contract provisions and loss experience of the insured during the
experience period. For such contracts, the Company




                                       52
<PAGE>

estimates the amount of ultimate premiums that the Company may earn upon
completion of the experience period and recognizes either an asset or a
liability for the difference between the initial policy premium and the
estimated ultimate premium. The Company adjusts such estimated ultimate premium
amounts during the course of the experience period based on actual results to
date. The resulting adjustment is recorded as either a reduction of or an
increase to the earned premiums for the period.

Revenues on interest-sensitive contracts are composed of contract charges and
fees, which are recognized over the coverage period. Premiums for other life
insurance products and annuities are recognized as revenue when due after
deductions for ceded insurance premiums.

CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES: Claim and claim adjustment expense
reserves, except reserves for structured settlements, workers compensation
lifetime claims and accident and health disability claims, are not discounted
and are based on 1) case basis estimates for losses reported on direct business,
adjusted in the aggregate for ultimate loss expectations; 2) estimates of
incurred but not reported losses (IBNR); 3) estimates of losses on assumed
reinsurance; 4) estimates of future expenses to be incurred in the settlement of
claims; and 5) estimates of salvage and subrogation recoveries. Management
considers current conditions and trends as well as past Company and industry
experience in establishing these estimates. The effects of inflation, which can
be significant, are implicitly considered in the reserving process and are part
of the recorded reserve balance. Reinsurance receivables are reported as an
asset in the Consolidated Balance Sheets.

FUTURE POLICY BENEFITS RESERVES: Reserves for traditional life insurance
products (whole and term life products) and long term care products are computed
using the net level premium method, which incorporates actuarial assumptions as
to interest rates, mortality, morbidity, withdrawals and expenses. Actuarial
assumptions generally vary by plan, age at issue and policy duration, and
include a margin for adverse deviation. Interest rates range from 3% to 9%, and
mortality, morbidity and withdrawal assumptions are based on Company and
industry experience prevailing at the time of issue. Expense assumptions include
the estimated effects of inflation and expenses to be incurred beyond the
premium paying period. Reserves for interest-sensitive contracts are equal to
the account balances that accrue to the benefit of the policyholders. Interest
crediting rates ranged from 4.3% to 6.5% for the three years ended December 31,
2001.

REINSURANCE: Amounts recoverable from reinsurers are estimated in a manner
consistent with claim and claim adjustment expense reserves or future policy
benefits reserves and are reported as a receivable in the Consolidated Balance
Sheets. An estimated allowance for doubtful accounts is recorded on the basis of
periodic evaluations of balances due from reinsurers, reinsurer solvency,
management's experience and current economic conditions.

ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes the SEC Staff's view in applying GAAP to revenue
recognition in financial statements. This bulletin, through its subsequent
revised releases SAB No. 101A and No. 101B, is effective for registrants no
later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. Adoption of this bulletin, which occurred on October 1, 2000, did not
have a significant impact on the results of operations or the equity of the
Company.

In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140).
SFAS 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of




                                       53
<PAGE>

Financial Assets and Extinguishments of Liabilities (SFAS 125). SFAS 140 revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures. The adoption
of SFAS 140 did not have a significant impact on the results of operations or
equity of the Company.

Effective January 1, 2001, the Company adopted the Codification of Statutory
Accounting Principles (Codification) for preparing its statutory-basis financial
statements for its insurance subsidiaries. Codification is intended to
standardize regulatory accounting and reporting to state insurance departments.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. The states in which CNAF's
insurance subsidiaries conduct business required adoption of Codification (with
certain modifications) effective January 1, 2001. The Company's adoption of
Codification, as modified, resulted in a decrease in statutory capital and
surplus of approximately $1.0 million, which relates primarily to deferred tax
assets, offset by insurance-related assessments and pension-related liabilities.

In conjunction with changes required by Codification related to the recording of
written premiums, CNA's property-casualty companies implemented a change,
effective January 1, 2001, in the timing of recording written premiums for
policies with future effective dates. The effect of this change was to reduce
net written premiums by $142 million for the year ended December 31, 2001. This
change had no impact on net earned premiums or net income.

In 2001, the Company adopted the FASB Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
and Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities (collectively referred to
as SFAS 133). The Company's initial adoption of SFAS 133 did not have a
significant impact on the equity of the Company; however, adoption of SFAS 133
resulted in an after-tax decrease to 2001 earnings of $61 million. Of this
transition amount, approximately $58 million related to investments and
investment-related derivatives. Because the Company already carried its
investment and investment-related derivatives at fair value through other
comprehensive income, there was an equal and offsetting favorable adjustment of
$58 million to stockholders' equity (accumulated other comprehensive income).
The remainder of the transition adjustment is attributable to collateralized
debt obligation products that are derivatives under SFAS 133.

On April 1, 2001 the Company adopted Emerging Issues Task Force Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF 99-20
establishes how a transferor that retains an interest in securitized financial
assets or an enterprise that purchases a beneficial interest in securitized
financial assets should account for interest income and impairment. The adoption
of EITF 99-20 did not have a significant impact on the results of operations or
equity of the Company.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations (SFAS 141). SFAS 141 requires companies to use the
purchase method of accounting for business combinations initiated after June 30,
2001 and prohibits the use of the pooling-of-interests method of accounting. CNA
has adopted this standard for all business combinations subsequent to June 30,
2001.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 changes the
accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach. Amortization of goodwill and
indefinite-lived intangible assets, including goodwill recorded in




                                       54
<PAGE>

past business combinations, will cease upon adoption of SFAS 142, which for CNA
will be January 1, 2002. In accordance with the transition guidance provided in
SFAS 142, the Company will complete goodwill and other acquired intangible asset
impairment tests by June 30, 2002. Any resulting asset impairments will be
recorded as a cumulative effect of a change in accounting principle as of
January 1, 2002. Additionally, the amortization expense for goodwill and other
acquired intangible assets identified as indefinite-lived that will not be
recorded in 2002 as a result of adoption of SFAS 142 is approximately $15
million.

In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
SFAS 144 addresses accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. The provisions of this statement
are effective for CNA beginning January 1, 2002. The Company estimates that the
initial adoption of SFAS 144 will not have a significant impact on the results
of operations or equity of the Company.

FORWARD-LOOKING STATEMENTS

This report includes a number of statements that relate to anticipated future
events (forward-looking statements) rather than actual present conditions or
historical events. You can identify forward-looking statements because generally
they include words such as "believes," "expects," "intends," "anticipates,"
"estimates" and similar expressions. Forward-looking statements in this report
include expected losses in the Company's insurance business, including losses
for asbestos, environmental pollution and other mass tort claims; the Company's
expectations concerning its revenues, earnings, expenses and investment
activities; expected cost savings and other results from the Company's
restructuring activities; and expected proceeds and terms of, and other matters
concerning, the Company's planned disposition of its U.K. reinsurance business.
Forward-looking statements, by their nature, are subject to a variety of risks
and uncertainties that could cause actual results to differ materially from the
results expected in the forward-looking statement. Many of these risks and
uncertainties cannot be controlled by the Company. Some examples of these risks
and uncertainties are:

-     general economic and business conditions;
-     changes in financial markets such as fluctuations in interest rates,
      credit conditions and currency, commodity and stock prices;
-     the effects of the Enron bankruptcy on energy and capital markets, and on
      the markets for directors & officers and errors & omissions coverages;
-     changes in foreign or domestic political, social and economic conditions,
      including the possible occurrence of terrorist attacks;
-     regulatory initiatives and compliance with governmental regulations,
      judicial decisions and rulings;
-     regulatory limitations and restrictions upon the Company and its insurance
      subsidiaries;
-     the impact of competitive products, policies and pricing and the
      competitive environment in which the Company operates;
-     product and policy availability and demand and market responses, including
      the effect of the absence of applicable terrorism legislation on
      coverages;
-     development of claims and the impact on loss reserves;
-     the performance of reinsurance companies under reinsurance contracts with
      the Company;



                                       55
<PAGE>

-     results of financing efforts;
-     changes in the Company's composition of operation segments;
-     exposure to liabilities due to claims made by insured and others relating
      to asbestos remediation and health-based asbestos impairments, and
      exposure to liabilities for environmental pollution and other mass tort
      claims;
-     the sufficiency of the Company's loss reserves and the possibility of
      future increases in reserves;
-     the possibility of changes in the Company's ratings by ratings agencies
      and changes in rating agency policies and practices;
-     the actual closing of contemplated transactions and agreements; and
-     various other matters and risks (many of which are beyond the Company's
      control) detailed in the Company's Securities and Exchange Commission
      filings.

Any forward-looking statements made in this report are made by the Company as of
the date of this report. The Company does not have any obligation to update or
revise any forward-looking statement contained in this report, even if the
Company's expectations or any related facts or circumstances change.



                                       56
<PAGE>


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31                                                                                   2001              2000
(In millions, except share data)                                                         ----------------   -------------
<S>                                                                                      <C>                <C>
ASSETS
Investments:

  Fixed maturity securities available-for-sale (amortized cost of $28,970 and $26,579)     $ 29,164            $ 26,652
  Equity securities available-for-sale (cost of $1,168 and $1,175)                            1,338               2,412
  Mortgage loans and real estate (less accumulated depreciation of $1 and $1)                    35                  26
  Policy loans                                                                                  194                 193
  Other invested assets                                                                       1,355               1,116
  Short-term investments                                                                      3,740               5,660
                                                                                           --------            --------

TOTAL INVESTMENTS                                                                            35,826              36,059

Cash and cash equivalents                                                                       142                 163
Receivables:
  Reinsurance                                                                                13,823               9,397
  Insurance                                                                                   4,006               5,026
  Allowance for doubtful accounts                                                              (351)               (321)
Accrued investment income                                                                       385                 404
Receivables for securities sold                                                                 443                 424
Deferred acquisition costs                                                                    2,424               2,418
Prepaid reinsurance premiums                                                                  1,221               1,445
Federal income taxes recoverable (includes $617 and $25 due from Loews)                         611                  15
Deferred income taxes                                                                           737                 503
Property and equipment at cost (less accumulated depreciation of $797 and $802)                 444                 716
Intangibles                                                                                     265                 317
Other assets                                                                                  2,194               2,152
Separate account business                                                                     3,798               4,314
                                                                                           ========            ========



TOTAL ASSETS                                                                               $ 65,968            $ 63,032
                                                                                           ========            ========
</TABLE>


  The accompanying Notes are an integral part of these Consolidated Financial
                                  Statements.



                                       57
<PAGE>

<TABLE>
<CAPTION>
                                                                                            2001                    2000
                                                                                       --------------          ---------------

<S>                                                                                    <C>                     <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:

  Insurance reserves:
    Claim and claim adjustment expense                                                       $ 31,266             $ 26,962
    Unearned premiums                                                                           4,505                4,821
    Future policy benefits                                                                      7,306                6,669
    Policyholders' funds                                                                          546                  602
  Collateral on loaned securities and derivatives                                                 923                2,245
  Payables for securities purchased                                                               606                  593
  Participating policyholders' funds                                                              118                  131
  Debt                                                                                          2,567                2,729
  Reinsurance balances payable                                                                  2,723                1,381
  Other liabilities                                                                             3,019                2,721
  Separate account business                                                                     3,798                4,314
                                                                                             --------             --------

TOTAL LIABILITIES                                                                              57,377               53,168
                                                                                             --------             --------

Commitments and contingencies (Notes A, F, G and K)

Minority interest                                                                                 224                  217

Stockholders' equity:
  Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270 and
    185,525,907 shares issued; and 223,596,861 and 183,263,873 shares outstanding)                565                  464
  Additional paid-in capital                                                                    1,031                  126
  Retained earnings                                                                             6,683                8,327
  Accumulated other comprehensive income                                                          226                  873
  Treasury stock, at cost                                                                         (70)                 (71)
                                                                                             --------             --------

                                                                                                8,435                9,719
  Notes receivable for the issuance of common stock                                               (68)                 (72)
                                                                                             --------             --------

TOTAL STOCKHOLDERS' EQUITY                                                                      8,367                9,647
                                                                                             --------             --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                   $ 65,968             $ 63,032
                                                                                             ========             ========
</TABLE>


  The accompanying Notes are an integral part of these Consolidated Financial
                                  Statements.



                                       58
<PAGE>




CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years ended December 31                                                          2001            2000             1999
(In millions, except per share data)                                          --------         --------         --------

<S>                                                                           <C>              <C>              <C>
REVENUES
  Net earned premiums                                                         $  9,365         $ 11,474         $ 13,282
  Net investment income                                                          1,897            2,286            2,194
  Realized investment gains, net of participating
    policyholders' and minority interests                                        1,265            1,028              200
  Other revenues                                                                   676              739              705
                                                                              --------         --------         --------

Total revenues                                                                  13,203           15,527           16,381
                                                                              --------         --------         --------

CLAIMS, BENEFITS AND EXPENSES
  Insurance claims and policyholders' benefits                                  11,383            9,831           11,890
  Amortization of deferred acquisition costs                                     1,804            1,880            2,143
  Other operating expenses                                                       1,913            1,800            2,074
  Restructuring and other related charges                                          251                -               83
  Interest                                                                         157              206              202
                                                                              --------         --------         --------

Total claims, benefits and expenses                                             15,508           13,717           16,392
                                                                              --------         --------         --------

(Loss) income before income tax, minority interest and
  cumulative effects of changes in accounting principles                        (2,305)           1,810              (11)
Income tax benefit (expense)                                                       743             (568)              88
Minority interest                                                                  (21)             (28)             (30)
                                                                              --------         --------         --------

(Loss) income before cumulative effects of changes in
  accounting principles                                                         (1,583)           1,214               47
Cumulative effects of changes in accounting principles,
  net of tax of $33, $0 and $95                                                    (61)               -             (177)
                                                                              --------         --------         --------

NET (LOSS) INCOME                                                             $ (1,644)        $  1,214         $   (130)
                                                                              ========         ========         ========



BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
  (Loss) income before cumulative effects of changes in
    accounting principles                                                     $  (8.16)        $   6.61         $   0.19
Cumulative effects of changes in accounting principles, net of tax               (0.32)               -            (0.96)
                                                                              --------         --------         --------

BASIC AND DILUTED (LOSS) EARNINGS PER SHARE AVAILABLE TO
  COMMON STOCKHOLDERS                                                         $  (8.48)        $   6.61         $  (0.77)
                                                                              ========         ========         ========

WEIGHTED AVERAGE OUTSTANDING COMMON STOCK AND COMMON
  STOCK EQUIVALENTS                                                              194.0            183.6            184.2
                                                                              ========         ========         ========
</TABLE>



  The accompanying Notes are an integral part of these Consolidated Financial
                                  Statements.



                                       59
<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years ended December 31                                                       2001             2000            1999
(In millions)                                                             --------------   -------------  --------------
<S>                                                                       <C>              <C>            <C>

CASH FLOWS  FROM OPERATING ACTIVITIES

  Net (loss) income                                                         $ (1,644)       $  1,214        $   (130)
  Adjustments to reconcile net (loss) income to net cash flows used
    by operating activities:
    Cumulative effects of changes in accounting principles, net of tax            61               -             177
    Loss on disposal of property and equipment                                    83              28             111
    Minority interest                                                             21              28              30
    Deferred income tax provision                                                 61             493             138
    Realized investment gains, net of participating
      policyholders' and minority interests                                   (1,265)         (1,028)           (200)
    Equity method income                                                         (58)           (299)           (114)
    Amortization of intangibles                                                   17              21              23
    Amortization of bond discount                                               (268)           (309)           (243)
    Depreciation                                                                 136             155             185
    Changes in:
      Receivables, net                                                        (3,376)         (1,664)             (9)
      Deferred acquisition costs                                                 (17)           (132)           (221)
      Accrued investment income                                                   19             (17)              6
      Federal income taxes recoverable/payable                                  (596)            254             (17)
      Prepaid reinsurance premiums                                               224              11            (152)
      Reinsurance balances payable                                             1,342             717             216
      Insurance reserves                                                       4,616            (128)         (1,193)
      Transfer of business via reinsurance                                         -             (41)         (1,149)
      Other, net                                                                  45            (648)           (281)
                                                                            --------        --------        --------

Total adjustments                                                              1,045          (2,559)         (2,693)
                                                                            --------        --------        --------

NET CASH FLOWS USED BY OPERATING ACTIVITIES                                     (599)         (1,345)         (2,823)
                                                                            --------        --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES

  Purchases of fixed maturity securities                                     (56,979)        (40,975)        (45,515)
  Proceeds from fixed maturity securities:
    Sales                                                                     51,112          38,502          43,587
    Maturities, calls and redemptions                                          3,930           4,222           2,996
  Purchases of equity securities                                              (1,287)         (1,858)         (1,575)
  Proceeds from sales of equity securities                                     2,311           2,935           1,803
  Change in short-term investments                                             2,028            (686)          1,183
  Change in collateral on loaned securities and
    derivatives                                                               (1,322)           (429)            894
  Change in other investments                                                   (182)            313             238
  Purchases of property and equipment                                           (124)           (152)           (250)
  Proceeds from sales of property and equipment                                  264               -               -
  Acquisitions, net of cash acquired                                             (19)             (2)            (19)
  Dispositions                                                                     7               -               -
  Other, net                                                                      56             (28)            (25)
                                                                            --------        --------        --------

NET CASH FLOWS (USED) PROVIDED BY INVESTING ACTIVITIES                      $   (205)       $  1,842        $  3,317
                                                                            --------        --------        --------
</TABLE>



  The accompanying Notes are an integral part of these Consolidated Financial
                                  Statements.



                                       60
<PAGE>









<TABLE>
<CAPTION>
                                                                              2001             2000              1999
                                                                         --------------   -------------     --------------
<S>                                                                      <C>              <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES

  Issuance of common stock                                                    $ 1,006          $    -          $    -
  Principal payments on debt                                                     (664)           (164)           (450)
  Proceeds from issuance of debt                                                  500               -             177
  Return of policyholder account balances on investment contracts                 (66)           (138)            (78)
  Redemption of preferred stock                                                     -            (150)           (200)
  Dividends paid to preferred stockholders                                          -              (1)            (13)
  Purchase of treasury stock                                                        -             (35)              -
  Receipts from investment contracts credited to policyholder account
    balances                                                                        2               5               7
  Other                                                                             5              (4)             (1)
                                                                              -------         -------         -------

NET CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES                            783            (487)           (558)
                                                                              -------         -------         -------

Net change in cash and cash equivalents                                           (21)             10             (64)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                      163             153             217
                                                                              -------         -------         -------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                      $   142         $   163         $   153
                                                                              =======         =======         =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid (received):

    Interest                                                                  $   147         $   205         $   201
    Federal income taxes                                                         (288)           (154)           (279)
  Non-cash transactions:
    Notes receivable for the issuance of common stock                               4              10              20
    Exchange of Canary Wharf Limited Partnership interest into common
      stock                                                                         -               -             539
</TABLE>


  The accompanying Notes are an integral part of these Consolidated Financial
                                  Statements.



                                       61

<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                             NOTES
                                                                                 ACCUMULATED               RECEIVABLE
                                                        ADDITIONAL                 OTHER                    FOR THE       TOTAL
                                  COMMON    PREFERRED    PAID-IN     RETAINED   COMPREHENSIVE   TREASURY  ISSUANCE OF  STOCKHOLDERS'
                                  STOCK       STOCK      CAPITAL     EARNINGS   INCOME (LOSS)    STOCK    COMMON STOCK    EQUITY
                               ----------- ----------- ------------ ----------- ------------- ----------- ------------ ------------
(In millions)
<S>                            <C>         <C>         <C>          <C>         <C>           <C>         <C>          <C>
BALANCE, JANUARY 1, 1999         $   464     $   350     $   126      $ 7,258      $ 1,064     $   (61)    $   (44)      $ 9,157

Comprehensive income:
  Net loss                            --          --          --         (130)          --          --          --          (130)
  Other comprehensive income          --          --          --           --          124          --          --           124
                                                                                                                         -------

Total comprehensive loss              --          --          --           --           --          --          --            (6)
Redemption of preferred stock         --        (200)         --           --           --          --          --          (200)
Increase in notes receivable
  from issuance of common stock       --          --          --           (1)          --          20         (19)           --
Preferred dividends                   --          --          --          (13)          --          --          --           (13)
                                 -------     -------     -------      -------      -------     -------     -------       -------

BALANCE, DECEMBER 31, 1999           464         150         126        7,114        1,188         (41)        (63)        8,938

Comprehensive income:
  Net income                          --          --          --        1,214           --          --          --         1,214
  Other comprehensive loss            --          --          --           --         (315)         --          --          (315)
                                                                                                                         -------

Total comprehensive income                                                                                                   899
Redemption of preferred stock         --        (150)         --           --           --          --          --          (150)
Purchase of treasury stock            --          --          --           --           --         (35)         --           (35)
Increase in notes receivable
  from issuance of common stock       --          --          --           --           --           5          (9)           (4)
Preferred dividends                   --          --          --           (1)          --          --          --            (1)
                                 -------     -------     -------      -------      -------     -------     -------       -------

BALANCE, DECEMBER 31, 2000           464          --         126        8,327          873         (71)        (72)        9,647

Comprehensive income:
  Net loss                            --          --          --       (1,644)          --          --          --        (1,644)
  Other comprehensive loss            --          --          --           --         (647)         --          --          (647)
                                                                                                                         -------

Total comprehensive loss              --          --          --           --           --          --          --        (2,291)
Issuance of common stock             101          --         905           --           --          --          --         1,006
Stock options exercised               --          --          --           --           --           1          --             1
Decrease in notes receivable
  from issuance of common stock       --          --          --           --           --          --           4             4
                                 -------     -------     -------      -------      -------     -------     -------       -------

BALANCE, DECEMBER 31, 2001       $   565     $    --     $ 1,031      $ 6,683      $   226     $   (70)    $   (68)      $ 8,367
                                 =======     =======     =======      =======      =======     =======     =======       =======
</TABLE>

        The accompanying Notes are an integral part of these Consolidated
                              Financial Statements.


                                       62
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The Consolidated Financial Statements include the accounts of CNA Financial
Corporation (CNAF) and its controlled subsidiaries, which include
property-casualty insurance companies (principally Continental Casualty Company
(CCC) and The Continental Insurance Company (CIC)) and life insurance companies
(principally Continental Assurance Company (CAC), Valley Forge Life Insurance
Company (VFL) and CNA Group Life Assurance Company (CNAGLAC)), collectively CNA
or the Company. Loews Corporation (Loews) owned approximately 89% of the
outstanding common stock of the Company as of December 31, 2001.

The accompanying Consolidated Financial Statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America (GAAP). All significant intercompany amounts have been eliminated.
Certain amounts applicable to prior years have been reclassified to conform to
the current year presentation.

The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.

BUSINESS

CNA serves a wide variety of customers, including small, medium and large
businesses; insurance companies; associations; professionals; and groups and
individuals with a broad range of insurance and risk management products and
services.

Insurance products include property-casualty coverages; life, accident and
health insurance; retirement products and annuities; and property-casualty, life
and group reinsurance. CNA services include risk management, information
services, healthcare claims management, claims administration and employee
leasing/payroll processing. CNA's products and services are marketed through
independent agents, brokers, managing general agents and direct sales.

INSURANCE OPERATIONS

EARNED PREMIUMS: Insurance premiums on property-casualty and accident and health
insurance contracts are earned ratably over the duration of the policies after
deductions for ceded insurance. The reserve for unearned premiums on these
contracts represents the portion of premiums written relating to the unexpired
terms of coverage.


                                       63
<PAGE>

Property-casualty contracts that are retrospectively rated contain contract
provisions that result in an adjustment to the initial policy premium depending
on the contract provisions and loss experience of the insured during the
experience period. For such contracts, the Company estimates the amount of
ultimate premiums that the Company may earn upon completion of the experience
period and recognizes either an asset or a liability for the difference between
the initial policy premium and the estimated ultimate premium. The Company
adjusts such estimated ultimate premium amounts during the course of the
experience period based on actual results to date. The resulting adjustment is
recorded as either a reduction of or an increase to the earned premiums for the
period.

Revenues on interest-sensitive contracts are composed of contract charges and
fees, which are recognized over the coverage period. Premiums for other life
insurance products and annuities are recognized as revenue when due after
deductions for ceded insurance premiums.

CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES: Claim and claim adjustment expense
reserves, except reserves for structured settlements, workers compensation
lifetime claims and accident and health disability claims, are not discounted
and are based on 1) case basis estimates for losses reported on direct business,
adjusted in the aggregate for ultimate loss expectations; 2) estimates of
incurred but not reported losses (IBNR); 3) estimates of losses on assumed
reinsurance; 4) estimates of future expenses to be incurred in the settlement of
claims; and 5) estimates of salvage and subrogation recoveries. Management
considers current conditions and trends as well as past Company and industry
experience in establishing these estimates. The effects of inflation, which can
be significant, are implicitly considered in the reserving process and are part
of the recorded reserve balance. Reinsurance receivables are reported as an
asset in the Consolidated Balance Sheets.

Structured settlements have been negotiated for certain property-casualty
insurance claims. Structured settlements are agreements to provide fixed
periodic payments to claimants. Certain structured settlements are funded by
annuities purchased from CAC for which the related annuity obligations are
reported in future policy benefits reserves. Obligations for structured
settlements not funded by annuities are included in claim and claim adjustment
expense reserves and carried at present values determined using interest rates
ranging from 6.0% to 7.5%. At December 31, 2001 and 2000, the discounted
reserves for unfunded structured settlements were $887 million and $884 million,
net of discount of $1,478 million and $1,473 million.

Workers compensation lifetime claim reserves and accident and health disability
claim reserves are calculated using mortality and morbidity assumptions based on
Company and industry experience, and are discounted at interest rates allowed by
insurance regulators that range from 3.5% to 6.5%. At December 31, 2001 and
2000, such discounted reserves totaled $2,384 million and $2,205 million, net of
discount of $978 million and $940 million.

FUTURE POLICY BENEFITS RESERVES: Reserves for traditional life insurance
products (whole and term life products) and long term care products are computed
using the net level premium method, which incorporates actuarial assumptions as
to interest rates, mortality, morbidity, withdrawals and expenses. Actuarial
assumptions generally vary by plan, age at issue and policy duration, and
include a margin for adverse deviation. Interest rates range from 3% to 9%, and
mortality, morbidity and withdrawal assumptions are based on Company and
industry experience prevailing at the time of issue. Expense assumptions include
the estimated effects of inflation and expenses to be incurred beyond the
premium paying period. Reserves for interest-sensitive contracts are equal to
the account balances that accrue to the benefit of the


                                       64
<PAGE>

policyholders. Interest crediting rates ranged from 4.3% to 6.5% for the three
years ended December 31, 2001.

GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS: In 1999, CNA adopted
Statement of Position No. 97-3, Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments (SOP 97-3). SOP 97-3 requires that insurance
companies recognize liabilities for guaranty fund and other insurance-related
assessments when an assessment is probable, when it can be reasonably estimated
and when the event obligating the entity to pay an imposed or probable
assessment has occurred on or before the date of the financial statements.
Adoption of SOP 97-3 resulted in an after-tax charge of $177 million as a
cumulative effect of a change in accounting principle in 1999. Liabilities for
guaranty funds and other insurance-related assessments are not discounted or
recorded net of premium taxes and are included as part of other liabilities in
the Consolidated Balance Sheets.

REINSURANCE: Amounts recoverable from reinsurers are estimated in a manner
consistent with claim and claim adjustment expense reserves or future policy
benefits reserves and are reported as a receivable in the Consolidated Balance
Sheets. An estimated allowance for doubtful accounts is recorded on the basis of
periodic evaluations of balances due from reinsurers, reinsurer solvency,
management's experience and current economic conditions.

Reinsurance contracts that do not meet the criteria for risk transfer are
recorded using the deposit method of accounting, which requires that premium
paid or received by the ceding company or assuming company be accounted for as a
deposit asset or liability. The Company primarily records these deposits as
reinsurance receivables for ceded recoverables and other liabilities for assumed
liabilities.

Income on reinsurance contracts that do not meet the criteria for risk transfer
is recognized using a constant effective yield based on the anticipated timing
of payments and the remaining life of the contract. When the estimate of timing
of payments changes, the effective yield is recalculated to reflect actual
payments to date and the estimated timing of future payments. The deposit asset
or liability is adjusted to the amount that would have existed had the new
effective yield been applied since the inception of the contract. This
adjustment is reflected in other revenue or other operating expense as
appropriate.

DEFERRED ACQUISITION COSTS: Costs, including commissions, premium taxes and
certain underwriting and policy issuance costs, that vary with and are related
primarily to the acquisition of property-casualty insurance business are
deferred and amortized ratably over the period the related premiums are earned.
Anticipated investment income is considered in the determination of the
recoverability of deferred acquisition costs.

The excess of first-year commissions over renewal commissions and other
first-year costs of acquiring life insurance business, such as agency and policy
issuance expenses, which vary with and are related primarily to the production
of new and renewal business, have been deferred and are amortized with interest
over the expected life of the related contracts. As an offset to this, the
excess of first-year costs over renewal ceded expense allowances, which also
vary with and are related primarily to the production of new and renewal
business, have been amortized with interest over the expected life of the
related contracts.

Acquisition costs related to non-participating traditional life insurance and
accident and health insurance are being amortized over the premium-paying period
of the related policies using assumptions consistent with those used for
computing future policy benefits reserves for such


                                       65
<PAGE>

contracts. Assumptions as to anticipated premiums are made at the date of policy
issuance or acquisition and are consistently applied during the lives of the
contracts. Deviations from estimated experience are included in operations when
they occur. For these contracts, the amortization period is typically the
estimated life of the policy.

For universal life and cash value annuity contracts, the amortization of
deferred acquisition costs is recorded in proportion to the present value of
estimated gross margins or profits. The gross margins or profits result from
actual earned interest minus actual credited interest, actual costs of insurance
(mortality) charges minus expected mortality, actual expense charges minus
maintenance expenses and surrender charges. Amortization interest rates are
based on rates in effect at the inception or acquisition of the contracts.
Actual gross margins or profits can vary from the Company's estimates resulting
in increases or decreases in the rate of amortization. When appropriate, the
Company revises its assumptions of the estimated gross margins or profits of
these contracts, and the cumulative amortization is re-estimated and adjusted
through current operations. To the extent that unrealized gains or losses on
available-for-sale securities would result in an adjustment of deferred
acquisition costs had they actually been realized, an adjustment is recorded to
deferred acquisition costs and to unrealized investment gains or losses.

Acquisition costs deferred are recorded net of ceding commissions and other
ceded acquisition costs. The Company periodically evaluates deferred acquisition
costs for recoverability; adjustments, if necessary, are recorded in current
operations.

INVESTMENTS IN LIFE SETTLEMENT CONTRACTS AND RELATED REVENUE RECOGNITION: The
Company has purchased life insurance policies in the form of life settlement
contracts. Under a life settlement contract, CNA purchases an inforce life
insurance contract at a substantial discount from the face value of the policy.
The carrying value of each contract is determined at the end of each reporting
period as the present value of expected proceeds reduced by the present value of
future premiums paid to keep the policy inforce based upon actuarial models that
incorporate mortality and interest rate assumptions. The carrying values of
these contracts are included in other assets with adjustments to increase the
carrying values reflected in other revenues. Mortality and interest rate
assumptions are reviewed periodically and are adjusted if deemed necessary.

SEPARATE ACCOUNT BUSINESS

CAC and VFL write investment and annuity contracts. The supporting assets and
liabilities of certain of these contracts are legally segregated and reported as
assets and liabilities of separate account business. CAC and VFL guarantee
principal and a specified return to the contract holders on approximately 53%
and 57% of the separate account business at December 31, 2001 and 2000.
Substantially all assets of the separate account business are carried at fair
value. Separate account liabilities are carried at contract values.

INVESTMENTS

Investment securities are exposed to various risks, such as interest rate,
market and credit. Due to the level of risk associated with certain investment
securities and the level of uncertainty related to changes in the value of
investment securities, it is possible that changes in risks in the near term
would materially affect the amounts reported in the Consolidated Balance Sheets
and Consolidated Statements of Operations.


                                       66
<PAGE>

VALUATION OF INVESTMENTS: CNA classifies its fixed maturity securities (bonds
and redeemable preferred stocks) and its equity securities as
available-for-sale, and as such, they are carried at fair value. The amortized
cost of fixed maturity securities is adjusted for amortization of premiums and
accretion of discounts to maturity, which are included in net investment income.
Changes in fair value are reported as a component of other comprehensive income.
Investments are written down to estimated fair values and losses are recognized
in income when a decline in value is determined to be other than temporary.

For asset-backed securities included in fixed maturity securities, the Company
recognizes income using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities. When estimates of
prepayments change, the effective yield is recalculated to reflect actual
payments to date and anticipated future payments. The net investment in the
securities is adjusted to the amount that would have existed had the new
effective yield been applied since the acquisition of the securities. Such
adjustments are reflected in net investment income.

Mortgage loans are carried at unpaid principal balances, including unamortized
premium or discount. Real estate is carried at depreciated cost. Policy loans
are carried at unpaid balances. Short-term investments are generally carried at
amortized cost, which approximates fair value.

Other invested assets include investments in limited partnerships and certain
derivative securities. The Company's limited partnership investments are
recorded at fair value and typically reflect a reporting lag of up to three
months. Fair value represents CNA's equity in the partnership's net assets as
determined by the General Partner.

Limited partnerships are a small portion of the Company's overall investment
portfolio. The majority of the limited partnerships invest in a substantial
number of securities that are readily marketable. The Company is a passive
investor and does not have influence over the management of these partnerships
that operate according to established guidelines and strategies. These
strategies may include the use of leverage and hedging techniques that
potentially introduce more volatility and risk to the partnerships.

Investments in derivative securities are carried at fair value with changes in
fair value reported as a component of realized gains or losses or other
comprehensive income, depending on its hedge designation.

INVESTMENT GAINS AND LOSSES: All securities transactions are recorded on the
trade date. Realized investment gains and losses are determined on the basis of
the cost or amortized cost of the specific securities sold.

EQUITY IN AFFILIATES: CNA uses the equity method of accounting for investments
in companies in which its ownership interest of the voting shares of an investee
company enables CNA to influence the operating or financial decisions of the
investee company but without a controlling financial interest. Equity in net
income of these affiliates is reported in other revenues.

SECURITIES LENDING ACTIVITIES: CNA lends securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must deposit
collateral with CNA of at least 102% of the fair value of the securities loaned
if the collateral is cash or securities. CNA maintains effective control over
all loaned securities and, therefore, continues to report such securities as
fixed maturity securities in the Consolidated Balance Sheets.



                                       67
<PAGE>

Cash collateral received on these transactions is invested in short-term
investments with an offsetting liability recognized for the obligation to return
the collateral. The fair value of collateral held and included in short-term
investments was $912 million and $1,822 million at December 31, 2001 and 2000.
Non-cash collateral, such as securities or letters of credit, received by the
Company are not reflected as assets of the Company as there exists no right to
sell or repledge the collateral. The fair value of non-cash collateral was $413
million and $391 million at December 31, 2001 and 2000.

DERIVATIVE FINANCIAL INSTRUMENTS

On January 1, 2001, the Company adopted the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities and Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities (collectively referred to as SFAS 133). The Company's
initial adoption of SFAS 133 did not have a significant impact on the equity of
the Company; however, adoption of SFAS 133 resulted in an after-tax decrease to
2001 earnings of $61 million. Of this transition amount, approximately $58
million related to investments and investment-related derivatives. Because the
Company already carried its investment and investment-related derivatives at
fair value through other comprehensive income, there was an equal and offsetting
favorable adjustment of $58 million to stockholders' equity (accumulated other
comprehensive income). The remainder of the transition adjustment is
attributable to collateralized debt obligation products that are derivatives
under SFAS 133.

A derivative is typically defined as an instrument whose value is "derived" from
an underlying instrument, index or rate, has a notional amount, requires no or
little initial investment and can be net settled. Derivatives include, but are
not limited to, the following types of investments: interest rate swaps,
interest rate caps and floors, put and call options, warrants, futures, forwards
and commitments to purchase securities and combinations of the foregoing.
Derivatives embedded within non-derivative instruments (such as call options
embedded in convertible bonds) must be split from the host instrument and
accounted for in accordance with SFAS 133 when the embedded derivative is not
clearly and closely related to the host instrument. In addition, non-investment
instruments, including certain types of insurance contracts that have
historically not been considered derivatives, may be derivatives or contain
embedded derivatives under SFAS 133.



                                       68
<PAGE>

SFAS 133 requires that all derivatives be recorded in the balance sheet at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge of exposures to changes in fair value, cash flows or
foreign currency exchange rates. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the nature of any
hedge designation thereon. The Company's accounting for changes in the fair
value of general account derivatives is as follows:

<TABLE>
<CAPTION>
Nature of Hedge Designation                     Derivative's Change in Fair Value Reflected In:
-------------------------------------------     -------------------------------------------------------------------
<S>                                             <C>
No hedge designation                            Realized investment gains or losses

Fair value                                      Realized investment gains or losses, along with the change in
                                                fair value of the hedged asset or liability

Cash flow                                       Other comprehensive income, with subsequent reclassification
                                                to earnings when the hedged transaction, asset or liability
                                                impacts earnings

Foreign currency                                Consistent with fair value or cash flow above, depending on the
                                                nature of the hedging relationship
</TABLE>

Changes in the fair value of derivatives held in the separate accounts are
reflected in separate account earnings. Because separate account investments are
generally carried at fair value with changes therein reflected in separate
account earnings, hedge accounting is generally not applicable to separate
account derivatives.

CNA uses investment derivatives in the normal course of business, primarily to
reduce its exposure to market risk (principally interest rate risk, equity stock
price risk and foreign currency risk) stemming from various assets and
liabilities. The Company's principal objective under such market risk strategies
is to achieve the desired reduction in economic risk, even if the position will
not receive hedge accounting treatment. The Company also uses derivatives for
purposes of income enhancement, primarily via the sale of covered call options.

The Company's use of derivatives is limited by statutes and regulations
promulgated by the various regulatory bodies to which it is subject, and by its
own derivative policy. The derivative policy limits the authorization to
initiate derivative transactions to certain personnel. The policy generally
prohibits the use of derivatives with a maturity greater than 18 months, unless
the derivative is matched with assets or liabilities having a longer maturity.
The policy prohibits the use of derivatives containing greater than one-to-one
leverage with respect to changes in the underlying price, rate or index. The
policy also prohibits the use of borrowed funds, including funds obtained
through repurchase transactions, to engage in derivative transactions.

Credit exposure associated with non-performance by the counterparties to
derivative instruments is generally limited to the gross fair value of the asset
related to the instruments recognized in the Consolidated Balance Sheets. The
Company mitigates the risk of non-performance by using multiple counterparties
and by monitoring their creditworthiness. The Company generally requires
collateral from its derivative investment counterparties depending on the amount
of the exposure and the credit rating of the counterparty.

The Company has exposure to economic losses due to interest rate risk arising
from changes in the level of, or volatility of, interest rates. The Company
attempts to mitigate its exposure to interest rate risk through active portfolio
management, which includes rebalancing its existing portfolios of assets and
liabilities, as well as changing the characteristics of investments to be




                                       69
<PAGE>

purchased or sold in the future. In addition, various derivative financial
instruments are used to modify the interest rate risk exposures of certain
assets and liabilities. These strategies include the use of interest rate swaps,
interest rate caps and floors, options, futures, forwards and commitments to
purchase securities. These instruments are generally used to lock interest rates
or unrealized gains, to shorten or lengthen durations of fixed maturity
securities or investment contracts, or to hedge (on an economic basis) interest
rate risks associated with investments, variable rate debt and life insurance
liabilities. The Company has used these types of instruments as designated
hedges against specific assets or liabilities on an infrequent basis.

The Company is exposed to equity price risk as a result of its investment in
equity securities and equity derivatives. Equity price risk results from changes
in the level or volatility of equity prices, which affect the value of equity
securities, or instruments that derive their value from such securities. CNA
attempts to mitigate its exposure to such risks by limiting its investment in
any one security or index. The Company may also manage this risk by utilizing
instruments such as options, swaps, futures and collars to protect appreciation
in securities held. CNA uses derivatives in one of its separate accounts to
mitigate equity price risk associated with its indexed group annuity contracts
by purchasing Standard & Poor's 500(R) (S&P 500(R)) index futures contracts in a
notional amount equal to the contract holder liability, which is calculated
using the S&P 500(R) rate of return.

Foreign exchange rate risk arises from the possibility that changes in foreign
currency exchange rates will impact the fair value of financial instruments
denominated in a foreign currency. The Company's foreign transactions are
primarily denominated in Canadian dollars, British pounds and euros. The Company
manages this risk via asset/liability matching and through the use of foreign
currency futures and/or forwards. The Company has infrequently designated these
types of instruments as hedges against specific assets or liabilities.

The contractual or notional amounts for derivatives are used to calculate the
exchange of contractual payments under the agreements and are not representative
of the potential for gain or loss on these instruments. Interest rates, equity
prices and foreign currency exchange rates affect the fair value of derivatives.
The fair values generally represent the estimated amounts that CNA would expect
to receive or pay upon termination of the contracts at the reporting date.
Dealer quotes are available for substantially all of CNA's derivatives. For
derivative instruments not actively traded, fair values are estimated using
values obtained from independent pricing services, costs to settle or quoted
market prices of comparable instruments.

CASH EQUIVALENTS

Cash equivalents are short-term, highly liquid investments that are both readily
convertible into known amounts of cash and so near to maturity that they present
insignificant risk of changes in value due to changing interest rates.

INCOME TAXES

The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes are recognized for
temporary differences between the financial statement and tax return bases of
assets and liabilities. Future tax benefits are recognized to the extent that
realization of such benefits are more likely than not.



                                       70
<PAGE>

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the various classes of
property and equipment and is determined principally on the straight-line
method.

INTANGIBLES

Intangibles include goodwill, representing the excess of purchase price over
fair value of the net assets of acquired entities, and other intangible assets.
Goodwill is generally amortized on a straight-line basis over the period of
expected benefit, generally ranging from 15 to 30 years. Other intangible assets
are amortized on a straight-line basis over their estimated economic lives.
Amortization expense on goodwill and other intangibles amounted to $17 million,
$21 million and $23 million for the years ended December 31, 2001, 2000 and
1999. Intangible assets are periodically reviewed to determine whether
impairment in value has occurred.

EARNINGS PER SHARE

(Loss) earnings per share applicable to common stock is based on
weighted-average outstanding shares. The computation of (loss) earnings per
share was as follows:

(LOSS) EARNINGS PER SHARE

<TABLE>
<CAPTION>
Years ended December 31                                                     2001           2000           1999
                                                                        -------------- -------------- --------------
(In millions, except per share amounts)
<S>                                                                     <C>            <C>            <C>
(Loss) income before cumulative effects of changes in
  accounting principles                                                   $    (1,583)   $     1,214    $        47
Cumulative effects of changes in accounting principles,
  net of tax of $33, $0 and $95                                                   (61)             -           (177)
Less preferred dividends                                                            -             (1)           (13)
                                                                        -------------- -------------- --------------

Net (loss) income applicable to common stock                              $    (1,644)   $     1,213    $      (143)
                                                                        ============== ============== ==============

Weighted-average outstanding common stock and common stock equivalents          194.0          183.6          184.2
Effect of dilutive securities, employee stock options                               -              -              -
                                                                        -------------- -------------- --------------

Adjusted weighted-average outstanding common stock and common stock
  equivalents assuming conversions                                              194.0          183.6          184.2
                                                                        ============== ============== ==============

BASIC AND DILUTED (LOSS) EARNINGS PER SHARE AVAILABLE TO COMMON
  STOCKHOLDERS                                                            $     (8.48)   $      6.61    $     (0.77)
                                                                        ============== ============== ==============
</TABLE>

ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes the SEC staff's view in applying GAAP to revenue
recognition in financial statements. This bulletin, through its subsequent
revised releases SAB No. 101A and No. 101B, was effective for registrants no
later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. Adoption of this bulletin, which occurred on October 1, 2000, did not
have a significant impact on the results of operations or the equity of the
Company.

In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 140). SFAS 140 replaces SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS 140 revises the standards for



                                       71
<PAGE>

accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. The adoption of SFAS 140 did not
have a significant impact on the results of operations or equity of the Company.

Effective January 1, 2001, the Company adopted the Codification of Statutory
Accounting Principles (Codification) for preparing its statutory-basis financial
statements for its insurance subsidiaries. Codification is intended to
standardize regulatory accounting and reporting to state insurance departments.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. The states in which CNA's
insurance subsidiaries conduct business required adoption of Codification (with
certain modifications) effective January 1, 2001. The Company's adoption of
Codification, as modified, resulted in a decrease in statutory capital and
surplus of approximately $1 million, which relates primarily to deferred tax
assets offset by insurance-related assessments and pension-related liabilities.

In conjunction with changes required by Codification related to the recording of
written premiums, CNA's property-casualty companies implemented a change,
effective January 1, 2001, in the timing of recording written premiums for
policies with future effective dates. The effect of this change was to reduce
net written premiums by $142 million for the year ended December 31, 2001. This
change had no impact on net earned premiums or net results.

On April 1, 2001, the Company adopted Emerging Issues Task Force Issue No.
99-20, Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF 99-20
establishes how a transferor that retains an interest in securitized financial
assets or an enterprise that purchases a beneficial interest in securitized
financial assets should account for interest income and impairment. The adoption
of EITF 99-20 did not have a significant impact on the results of operations or
equity of the Company.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations (SFAS 141). SFAS 141 requires companies to use the
purchase method of accounting for business combinations initiated after June 30,
2001 and prohibits the use of the pooling-of-interests method of accounting. CNA
has adopted this standard for all business combinations subsequent to June 30,
2001.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 changes the
accounting for goodwill and indefinite-lived intangible assets from an
amortization method to an impairment-only approach. Amortization of goodwill and
indefinite-lived intangible assets, including goodwill recorded in past business
combinations, will cease upon adoption of SFAS 142, which for CNA will be
January 1, 2002. In accordance with the transition guidance provided in SFAS
142, the Company will complete goodwill and other acquired intangible asset
impairment tests by June 30, 2002. Any resulting asset impairments will be
recorded as a cumulative effect of a change in accounting principle as of
January 1, 2002. Additionally, the amortization expense for goodwill and other
acquired intangible assets identified as indefinite-lived that will not be
recorded in 2002 as a result of adoption of SFAS 142 is approximately $15
million.

In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
SFAS 144 addresses accounting and reporting for the impairment or disposal of
long-lived assets. This



                                       72
<PAGE>

statement supersedes FASB Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. The provisions of this statement are effective for CNA beginning
January 1, 2002. The initial adoption of SFAS 144 will not have a significant
impact on the results of operations and/or the financial position of the
Company.

NOTE B. INVESTMENTS

During 2001, the Company reclassified equity method income from limited
partnership investments. This income was previously classified in realized
investment gains, net of participating policyholders' and minority interests and
is now classified in net investment income.

The significant components of net investment income are presented in the
following table.

NET INVESTMENT INCOME

<TABLE>
<CAPTION>
Years ended December 31                                                     2001           2000           1999
                                                                        -------------- -------------- --------------
(In millions)
<S>                                                                     <C>            <C>            <C>
Fixed maturity securities                                                 $     1,855    $     1,766    $     1,776
Short-term investments                                                            135            201            188
Limited partnerships                                                               47            293            115
Other, including interest on funds withheld and other
  deposits                                                                        (82)            74            156
                                                                        -------------- -------------- --------------

Gross investment income                                                         1,955          2,334          2,235
Investment expense                                                                (58)           (48)           (41)
                                                                        -------------- -------------- --------------

NET INVESTMENT INCOME                                                     $     1,897    $     2,286    $     2,194
                                                                        ============== ============== ==============
</TABLE>









                                       73
<PAGE>

Net realized investment gains (losses) and net change in unrealized appreciation
(depreciation) in investments were as follows:

NET INVESTMENT APPRECIATION

<TABLE>
<CAPTION>
Years ended December 31                                                     2001           2000            1999
                                                                        -------------- -------------- ---------------
(In millions)
<S>                                                                     <C>            <C>             <C>
Net realized investment gains (losses):
  Fixed maturity securities:

    Gross realized gains                                                  $       938    $       434    $        269
    Gross realized losses                                                        (600)          (564)           (580)
                                                                        -------------- -------------- ---------------

      Net realized gains (losses) on fixed maturity securities                    338           (130)           (311)
                                                                        -------------- -------------- ---------------

  Equity securities:
    Gross realized gains                                                        1,337          1,337             481
    Gross realized losses                                                        (241)          (221)           (115)
                                                                        -------------- -------------- ---------------

      Net realized gains on equity securities                                   1,096          1,116             366
                                                                        -------------- -------------- ---------------

      Other realized investment (losses) gains                                   (154)            46             138
                                                                        -------------- -------------- ---------------

Net realized investment gains before allocation to participating
  policyholders' and minority interests                                         1,280          1,032             193
Allocation to participating policyholders' and minority interests                 (15)            (4)              7
Income tax expense                                                               (447)          (358)            (84)
                                                                        -------------- -------------- ---------------

Net realized investment gains                                                     818            670             116
                                                                        -------------- -------------- ---------------

Net change in unrealized appreciation (depreciation) in general account
  investments:
  Fixed maturity securities                                                        93            773          (1,262)
  Equity securities                                                            (1,127)        (1,223)          1,545
  Other                                                                           (19)           (52)             18
                                                                        -------------- -------------- ---------------

Total net change in unrealized (depreciation) appreciation in general
  account investments                                                          (1,053)          (502)            301
Net change in unrealized appreciation (depreciation) on separate
  accounts and other                                                                7             66             (59)
Cumulative effect of change in accounting principle, net of tax of $30             58              -               -
Allocation to participating policyholders' and minority interests                  (4)           (12)             24
Deferred income tax benefit (expense)                                             363            161            (100)
                                                                        -------------- -------------- ---------------

Net change in unrealized (depreciation) appreciation in investments              (629)          (287)            166
                                                                        -------------- -------------- ---------------

NET REALIZED GAINS AND CHANGE IN UNREALIZED APPRECIATION IN
  INVESTMENTS                                                             $       189    $       383    $        282
                                                                        ============== ============== ===============
</TABLE>

Other realized investment gains (losses) for the years ended December 31, 2001,
2000 and 1999 include gains and losses related to the sale and losses associated
with the anticipated sale of certain operations or affiliates. See Note P.

In March 2000, the Company entered into hedge agreements related to its
investment in Global Crossing common stock (Global Crossing). The unrealized
appreciation on the stock that was preserved by the hedge was reflected as an
unrealized gain in accumulated other comprehensive income at October 31, 2000.
The hedge agreements were closed out in 2001 resulting in the realized gain of
$962 million.


                                       74
<PAGE>

The unrealized gain on the Company's position in Global Crossing, including the
fair market value of the related hedge discussed in Note C, was $902 million at
December 31, 2000. Changes in the Company's investment in Global Crossing, on a
pretax basis, were as follows.

CHANGES IN NET REALIZED GAINS AND UNREALIZED APPRECIATION (DEPRECIATION) FOR
GLOBAL CROSSING


<TABLE>
<CAPTION>
Years ended December 31                                                     2001           2000           1999
                                                                        -------------- -------------- --------------
(In millions)
<S>                                                                     <C>            <C>            <C>
(Decrease) increase in unrealized gain on common stock                    $     (239)    $    (1,525)   $       924
Cumulative effect of a change in accounting principle                            (60)              -              -
(Decrease) increase in unrealized gain on options collar                        (663)            663              -
                                                                        -------------- -------------- --------------

Net (decrease) increase in unrealized gain on position in Global
  Crossing                                                                $     (962)    $      (862)    $       924
                                                                        ============== ============== ==============

REALIZED GAINS ON SALES OF GLOBAL CROSSING                                $      962     $       485     $       222
                                                                        ============== ============== ==============
</TABLE>


The following tables provide a summary of investments in fixed maturity and
equity securities available-for-sale.

SUMMARY OF FIXED MATURITY AND EQUITY SECURITIES
<TABLE>
<CAPTION>
                                                            COST OR         GROSS          GROSS        ESTIMATED
                                                           AMORTIZED     UNREALIZED     UNREALIZED        FAIR
December 31, 2001                                            COST           GAINS         LOSSES          VALUE
                                                         -------------- -------------- -------------- --------------
(In millions)
<S>                                                      <C>            <C>            <C>            <C>
U.S. Treasury securities and obligations of government
  agencies                                                 $     5,002    $       109    $        30    $     5,081
Asset-backed securities                                          7,603            139             19          7,723
States, municipalities and political subdivisions -
  tax-exempt                                                     2,748             19             47          2,720
Corporate securities                                             9,569            247            229          9,587
Other debt securities                                            3,811            152            147          3,816
Redeemable preferred stocks                                         48              1              1             48
Options embedded in convertible debt securities                    189              -              -            189
                                                         -------------- -------------- -------------- --------------

Total fixed maturity securities                                 28,970            667            473         29,164
Equity securities                                                1,168            343            173          1,338
                                                         -------------- -------------- -------------- --------------

TOTAL                                                      $    30,138    $     1,010    $       646    $    30,502
                                                         ============== ============== ============== ==============

December 31, 2000

U.S. Treasury securities and obligations of government
  agencies                                                 $     5,103    $       198    $         3    $     5,298
Asset-backed securities                                          7,549            100             26          7,623
States, municipalities and political subdivisions -
  tax-exempt                                                     3,279             79              9          3,349
Corporate securities                                             7,237            149            342          7,044
Other debt securities                                            3,357             63            136          3,284
Redeemable preferred stocks                                         54              -              -             54
                                                         -------------- -------------- -------------- --------------

Total fixed maturity securities                                 26,579            589            516         26,652
Equity securities                                                1,175          1,400            163          2,412
                                                         -------------- -------------- -------------- --------------

TOTAL                                                      $    27,754    $     1,989    $       679    $    29,064
                                                         ============== ============== ============== ==============
</TABLE>




                                       75
<PAGE>

The following table summarizes fixed maturity securities, including embedded
derivative financial instruments, by contractual maturity at December 31, 2001.

CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
                                                                                                        ESTIMATED
                                                                                         AMORTIZED         FAIR
                                                                                           COST           VALUE
                                                                                       -------------- ---------------
(In millions)
<S>                                                                                    <C>            <C>
Due in one year or less                                                                  $       331    $        367
Due after one year through five years                                                          5,531           5,497
Due after five years through ten years                                                         9,595           9,599
Due after ten years                                                                            5,910           5,978
Asset-backed securities                                                                        7,603           7,723
                                                                                       -------------- ---------------

TOTAL                                                                                    $    28,970    $     29,164
                                                                                       ============== ===============
</TABLE>


Actual maturities may differ from contractual maturities because certain
securities may be called or prepaid with or without call or prepayment
penalties.

The carrying value of investments (other than equity securities) that did not
produce income during 2001 was $186 million. At December 31, 2001, no
investments, other than investments in U.S. government agency securities,
exceeded 10% of stockholders' equity.

RESTRICTED INVESTMENTS

The Company may from time to time invest in securities that may be restricted in
whole or in part. As of December 31, 2001, the Company did not hold any
significant positions in investments whose sale was restricted.

Cash and securities with carrying values of approximately $2.0 billion and $1.9
billion were deposited by the Company's insurance subsidiaries under
requirements of regulatory authorities as of December 31, 2001 and 2000.

Cash and securities with carrying values of approximately $30 million and $41
million were deposited with financial institutions as collateral for letters of
credit as of December 31, 2001 and 2000. See Note K.




                                       76
<PAGE>

NOTE C. DERIVATIVE FINANCIAL INSTRUMENTS

A summary of the aggregate contractual or notional amounts, estimated fair
values and recognized gains (losses) related to derivative financial instruments
follows.

DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
                                                         CONTRACTUAL/                                  RECOGNIZED
                                                           NOTIONAL                                       GAINS
As of and for the year ended December 31, 2001              AMOUNT          ASSET       (LIABILITY)     (LOSSES)
                                                         -------------- -------------- -------------- --------------
(In millions)
<S>                                                      <C>            <C>            <C>            <C>
GENERAL ACCOUNT
  Swaps                                                    $       504    $         3    $         -    $         1
  Interest rate caps                                               500              2              -              1
  Futures sold, not yet purchased                                   14              -              -            (11)
  Forwards                                                         183              -             (2)           (15)
  Commitments to purchase government and municipal
    securities                                                     213             16              -             16
  Equity warrants                                                   15              1              -             (3)
  Collateralized debt obligation liabilities                       170              -            (38)             5
  Options purchased                                                 10              -              -             (5)
  Options purchased - Global Crossing                                -              -              -            143
  Options written                                                    -              -              -              5
  Options embedded in convertible debt securities                  803            189              -             10
                                                         -------------- -------------- -------------- --------------

TOTAL                                                      $     2,412    $       211    $       (40)   $       147
                                                         ============== ============== ============== ==============

SEPARATE ACCOUNTS
  Futures purchased                                        $       884    $         -    $        (8)    $     (157)
  Futures sold, not yet purchased                                   10              -              -             (1)
  Commitments to purchase government and municipal
    securities                                                      17              -              -             (2)
  Options purchased                                                 65              1              -             (1)
  Options written                                                   70              -              -              2
                                                         -------------- -------------- -------------- --------------

TOTAL                                                      $     1,046    $         1    $        (8)   $      (159)
                                                         ============== ============== ============== ==============
</TABLE>


Collateralized debt obligation liabilities (CDOs) represent a credit enhancement
product that is typically structured in the form of a swap. The Company has
determined that this product is a derivative under SFAS 133. Changes in the
estimated fair value of CDOs, like other derivative financial instruments with
no hedge designation, are recorded in realized gains or losses as appropriate.
Default losses incurred on these instruments are reported in other expense. The
Company incurred approximately $25 million and $13 million of default losses on
these products for the years ended December 31, 2001 and 2000. There were no
default losses on these products during 1999. The Company is no longer writing
this product.

Options embedded in convertible debt securities are classified as fixed maturity
securities in the Consolidated Balance Sheets, consistent with the host
instruments.



                                       77
<PAGE>

DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
                                                         CONTRACTUAL/                                  RECOGNIZED
                                                           NOTIONAL                                       GAINS
As of and for the year ended December 31, 2000              AMOUNT          ASSET       (LIABILITY)     (LOSSES)
                                                         -------------- -------------- -------------- --------------
(In millions)
<S>                                                      <C>            <C>            <C>            <C>
GENERAL ACCOUNT
  Swaps                                                    $         5    $         -    $         -    $        12
  Interest rate caps                                               500              1              -             (3)
  Futures sold, not yet purchased                                   80              -              -             (7)
  Forwards                                                          13              -              -             54
  Commitments to purchase government and municipal
    securities                                                       -              -              -              5
  Options purchased                                                 18              1              -             (9)
  Options written                                                    -              -              -              8
  Options purchased - Global Crossing                            1,000            664              -              -
  Options written - Global Crossing                              1,256              -             (1)             -
                                                         -------------- -------------- -------------- --------------

TOTAL                                                      $     2,872    $       666    $        (1)   $        60
                                                         ============== ============== ============== ==============

SEPARATE ACCOUNTS
  Futures purchased                                        $       996    $         -    $       (13)   $      (172)
  Futures sold, not yet purchased                                   76              -              -             (4)
  Commitments to purchase government and municipal
    securities                                                     111              1              -              4
  Options purchased                                                110              -              -             (2)
  Options written                                                  118              -             (1)             4
                                                         -------------- -------------- -------------- --------------

TOTAL                                                      $     1,411    $         1    $       (14)   $      (170)
                                                         ============== ============== ============== ==============
</TABLE>


                                       78
<PAGE>

Immediately following adoption of SFAS 133 on January 1, 2001, which did not
impact derivatives included in separate account investments, the Company's
general account derivative holdings were as follows:

DERIVATIVE FINANCIAL INSTRUMENTS

<TABLE>
<CAPTION>
                                                                                                       CUMULATIVE
                                                                                                       EFFECT OF A
                                                         CONTRACTUAL/                                   CHANGE IN
                                                           NOTIONAL                                    ACCOUNTING
January 1, 2001                                             AMOUNT          ASSET       (LIABILITY)     PRINCIPLE
                                                         -------------- -------------- -------------- --------------
(In millions)
<S>                                                      <C>            <C>            <C>            <C>
GENERAL ACCOUNT
  Swaps                                                    $         5    $         -       $      -    $         -
  Interest rate caps                                               500              1              -              -
  Futures sold, not yet purchased                                   80              -              -              -
  Forwards                                                          13              -              -              -
  Equity warrants                                                   10              4              -             (1)
  Collateralized debt obligation liabilities                       170              -            (18)            (6)
  Options purchased                                                 18              1              -              -
  Options purchased - Global Crossing                            1,000            664              -            420
  Options written - Global Crossing                              1,256              -             (1)           243
  Options embedded in convertible debt securities                  845            231              -            231
                                                         -------------- -------------- -------------- --------------

TOTAL                                                      $     3,897    $       901       $    (19)           887
                                                         ============== ============== ==============

Unrealized loss on Global Crossing common stock                                                                (723)
Adjustment on convertible debt securities with embedded options                                                (258)
                                                                                                      --------------

Cumulative effect of a change in accounting principle                                                           (94)
Tax benefit on cumulative effect of a change in accounting principle                                             33
                                                                                                      --------------

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX                                       $       (61)
                                                                                                      ==============
</TABLE>

FAIR VALUE HEDGES

As of the adoption date of SFAS 133, the Company's collar position, which was
entered into during 2000, related to its investment in Global Crossing was the
only derivative position that had been designated as a hedge for accounting
purposes. The nature of the transition adjustment related to this hedge was such
that the $962 million unrealized gain that existed on Global Crossing when the
hedge was established was preserved in accumulated other comprehensive income.
During 2001, the Company's collar position related to Global Crossing was
terminated and the related stock was sold.

The effectiveness of this hedge was measured based on changes in the intrinsic
value of the collar in relation to changes in the fair value of Global Crossing.
Changes in the time value component of the collar's fair value were excluded
from the hedge designation and measurement of effectiveness. Up to the date of
the sale, the Global Crossing hedge was 100% effective. The change in the time
value component of the collar was a pretax gain of $33 million for the year
ended December 31, 2001, and has been recorded as a realized investment gain in
the Consolidated Statements of Operations.

The Company's other hedging activities involve primarily hedging risk exposures
to interest rate and foreign currency risks. The ineffective portion of the fair
value hedges that under SFAS 133 meet the criteria for hedge accounting was
approximately $1 million for the year ended December 31, 2001. See Note B.



                                       79
<PAGE>

NOTE D. FINANCIAL INSTRUMENTS

In the normal course of business, CNA invests in various financial assets,
incurs various financial liabilities and enters into agreements involving
derivative securities.

Fair values are disclosed for all financial instruments, for which it is
practicable to estimate fair value, whether or not such values are recognized in
the Consolidated Balance Sheets. Management attempts to obtain quoted market
prices for these disclosures. Where quoted market prices are not available, fair
values are estimated using present value or other valuation techniques. These
techniques are significantly affected by management's assumptions, including
discount rates and estimates of future cash flows. Potential taxes and other
transaction costs have not been considered in estimating fair values. The
estimates presented herein are not necessarily indicative of the amounts that
CNA would realize in a current market exchange.

Non-financial instruments such as real estate, deferred acquisition costs,
property and equipment, deferred income taxes and intangibles, and certain
financial instruments such as insurance reserves and leases are excluded from
the fair value disclosures. Therefore, the fair value amounts cannot be
aggregated to determine the underlying economic value of the Company.

The carrying amounts reported in the Consolidated Balance Sheets for cash and
cash equivalents, short-term investments, accrued investment income, receivables
for securities sold, federal income taxes recoverable, collateral on loaned
securities and derivatives, payables for securities purchased, and certain other
assets and other liabilities approximate fair value because of the short-term
nature of these items. These assets and liabilities are not listed in the
following tables.

The following methods and assumptions were used by CNA in estimating the fair
value for financial assets and liabilities.

The fair values of fixed maturity and equity securities were based on quoted
market prices, where available. For securities not actively traded, fair values
were estimated using values obtained from independent pricing services or quoted
market prices of comparable instruments.

The fair values for mortgage loans and policy loans were estimated using
discounted cash flows utilizing interest rates currently offered for similar
loans to borrowers of comparable credit quality. Loans with similar
characteristics were aggregated for purposes of these calculations.

Premium deposits and annuity contracts were valued based on cash surrender
values and the outstanding fund balances.

Valuation techniques to determine fair value of other invested assets and other
separate account business assets consisted of discounting cash flows, obtaining
quoted market prices of the investments and comparing the investments to similar
instruments or to the underlying assets of the investments.

CNA's senior notes and debentures were valued based on quoted market prices. The
fair value for other long-term debt was estimated using discounted cash flows
based on current incremental borrowing rates for similar borrowing arrangements.



                                       80
<PAGE>

The fair values of collateralized debt obligation liability contracts are
determined largely based on management's estimates using default probabilities
of the debt securities underlying the contract, which are obtained from a rating
agency, the term of the contract, and actual default losses recorded on these
contracts.

The fair values of financial guarantee contracts were estimated using discounted
cash flows utilizing interest rates currently offered for similar contracts.

The fair values of guaranteed investment contracts of the separate account
business were estimated using discounted cash flow calculations based on
interest rates currently offered for similar contracts with similar maturities.
The fair values of the liabilities for variable separate account business were
based on the quoted market values of the underlying assets of each variable
separate account. The fair values of other separate account liabilities
approximate their carrying value because of their short-term nature.

The carrying amount and estimated fair value of CNA's financial instrument
assets and liabilities are listed in the following table. The 2001 presentation
is not comparable to the prior year presentation due to the adoption of SFAS
133. Additional detail related to derivative financial instruments is also
provided in a separate table. See Note C.

FINANCIAL ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
December 31                                                          2001                          2000
                                                         ----------------------------- -----------------------------
                                                                          ESTIMATED                     ESTIMATED
                                                           CARRYING         FAIR         CARRYING         FAIR
                                                            AMOUNT          VALUE         AMOUNT          VALUE
                                                         -------------- -------------- -------------- --------------
(In millions)
<S>                                                      <C>            <C>            <C>            <C>
FINANCIAL ASSETS
Investments:
  Fixed maturity securities                              $    29,164    $    29,164    $    26,652    $    26,652
  Equity securities                                            1,338          1,338          2,412          2,412
  Mortgage loans                                                  31             31             22             23
  Policy loans                                                   194            186            193            180
  Other invested assets                                        1,355          1,355          1,116          1,116
Separate account business:
  Fixed maturity securities                                    2,347          2,347          2,703          2,703
  Equity securities                                              161            161            215            215
  Other                                                          876            876            849            849
Notes receivable for the issuance of common stock                 68             78             72             58

FINANCIAL LIABILITIES

Premium deposits and annuity contracts                   $     1,465    $     1,395    $     1,486    $     1,419
Debt                                                           2,567          2,277          2,729          2,595
Collateralized debt obligation liabilities                        38             38              -              -
Financial guarantee contracts                                     98             96            150            128

Separate account business:
  Guaranteed investment contracts                                469            492            882            880
  Variable separate accounts                                   1,146          1,146          1,387          1,387
  Other                                                          622            622            623            623
</TABLE>



NOTE E. INCOME TAXES

CNA and its eligible subsidiaries (CNA Tax Group) are included in the
consolidated federal income tax return of Loews and its eligible subsidiaries.
Loews and CNA have agreed that for each taxable year, CNA will 1) be paid by
Loews the amount, if any, by which the Loews consolidated federal income tax
liability is reduced by virtue of the inclusion of the CNA Tax


                                       81
<PAGE>

Group in the Loews consolidated federal income tax return or 2) pay to Loews an
amount, if any, equal to the federal income tax that would have been payable by
the CNA Tax Group filing a separate consolidated tax return. In the event that
Loews should have a net operating loss in the future computed on the basis of
filing a separate consolidated tax return without the CNA Tax Group, CNA may be
required to repay tax recoveries previously received from Loews. Either party
may cancel this agreement upon 30 days written notice.

For 2001, the inclusion of the CNA Tax Group in the consolidated federal income
tax return of Loews decreased the Loews federal income tax liability.
Accordingly, Loews has paid or will pay CNA approximately $908 million for 2001.
In 2000, the inclusion of the CNA Tax Group on the consolidated federal income
tax return of Loews increased the Loews federal income tax liability.
Accordingly, CNA paid Loews approximately $64 million for 2000. In 1999, the
inclusion of the CNA Tax Group in the consolidated federal income tax return of
Loews resulted in a decreased federal income tax liability for Loews.
Accordingly, Loews has paid CNA approximately $288 million for 1999.

A reconciliation between CNA's federal income tax (benefit) expense at statutory
rates and the recorded income tax (benefit) expense, after giving effect to
minority interest, but before giving effect to the cumulative effects of changes
in accounting principles, is as follows:

TAX RATE RECONCILIATION

<TABLE>
<CAPTION>
Years ended December 31                                                     2001           2000           1999
                                                                        -------------- -------------- --------------
(In millions)
<S>                                                                     <C>            <C>            <C>
Income tax (benefit) expense at statutory rates                           $      (814)   $       624    $       (14)
Foreign net operating loss carry-forward                                           90              -              -
Tax benefit from tax exempt income                                                (37)           (71)           (84)
Other expense, including state income taxes                                        18             15             10
                                                                        -------------- -------------- --------------

EFFECTIVE INCOME TAX (BENEFIT) EXPENSE                                    $      (743)   $       568    $       (88)
                                                                        ============== ============== ==============
</TABLE>


Provision has been made for the estimated U.S. federal income tax liabilities
applicable to undistributed earnings of subsidiaries, except for certain
subsidiaries for which the Company intends to leave the earnings undistributed
indefinitely. Foreign net operating loss carryforwards reflected above pertain
to those foreign subsidiaries for which no tax benefit is expected to be
realized.

The composition of CNA's total income tax (benefit) expense allocated between
operating results and realized investment gains and losses, excluding the
cumulative effects of the changes in accounting principles, is as follows:

COMPONENTS OF TAX PROVISION

<TABLE>
<CAPTION>
Years ended December 31                                                     2001           2000           1999
                                                                        -------------- -------------- --------------
(In millions)
<S>                                                                     <C>            <C>            <C>
Income tax (benefit) expense on operating results                         $    (1,190)   $       210    $      (172)
Income tax expense on realized investment gains                                   447            358             84
                                                                        -------------- -------------- --------------

TOTAL INCOME TAX (BENEFIT) EXPENSE                                        $      (743)   $       568    $       (88)
                                                                        ============== ============== ==============
</TABLE>





                                       82
<PAGE>
The current and deferred components of CNA's income tax (benefit) expense,
excluding taxes on the cumulative effects of the changes in accounting
principles, are as follows:

CURRENT AND DEFERRED TAXES

<TABLE>
<CAPTION>
Years ended December 31                                                      2001              2000              1999
(In millions)                                                           --------------    --------------    --------------
<S>                                                                     <C>               <C>               <C>
Current tax (benefit) expense                                           $        (804)    $          75     $        (226)
Deferred tax expense                                                               61               493               138
                                                                        --------------    --------------    --------------

TOTAL INCOME TAX (BENEFIT) EXPENSE                                      $        (743)    $         568     $         (88)
                                                                        ==============    ==============    ==============
</TABLE>




The deferred tax effects of the significant components of CNA's deferred tax
assets and liabilities are set forth in the table below.

COMPONENTS OF NET DEFERRED TAX ASSETS

<TABLE>
<CAPTION>
December 31                                                                               2001                 2000
(In millions)                                                                          -----------          -----------
<S>                                                                                    <C>                  <C>

DEFERRED TAX ASSETS (LIABILITIES)
Insurance reserves:
  Property-casualty claim reserves                                                         $ 697               $ 864
  Unearned premium reserves                                                                  332                 294
  Life reserves                                                                              231                 187
  Other insurance reserves                                                                    18                  21
Deferred acquisition costs                                                                  (743)               (763)
Net unrealized gains                                                                        (138)               (470)
Postretirement benefits other than pensions                                                  125                 134
Foreign affiliate(s) related                                                                  69                 110
Receivables                                                                                  100                  82
Accrued assessments and guarantees                                                            53                  43
Restructuring costs                                                                           44                  20
AMT credit carried forward                                                                    40                   -
Investment valuation differences                                                             (50)                 10
Other, net                                                                                   (41)                (29)
                                                                                           -----               -----

NET DEFERRED TAX ASSET                                                                     $ 737               $ 503
                                                                                           =====               =====
</TABLE>




The gross deferred tax assets and liabilities amounted to approximately $2.0
billion and $1.3 billion at December 31, 2001 and $1.9 billion and $1.4 billion
at December 31, 2000. Although realization of deferred tax assets is not
assured, management believes it is more likely than not that deferred tax assets
will be realized through future earnings, including but not limited to the
generation of future operating income and reversal of existing temporary
differences and available tax planning strategies. As a result, no valuation
allowance was recorded at December 31, 2001 and 2000.

The CNA Tax Group, through its tax agreement with Loews, has fully utilized its
net operating loss carry-back during 2001.





                                       83
<PAGE>




NOTE F. CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES

CNA's property-casualty insurance claim and claim adjustment expense reserves
represent the estimated amounts necessary to settle all outstanding claims,
including claims that are incurred but not reported as of the reporting date.
The Company's reserve projections are based primarily on detailed analysis of
the facts in each case, CNA's experience with similar cases and various
historical development patterns. Consideration is given to such historical
patterns as field reserving trends and claims settlement practices, loss
payments, pending levels of unpaid claims and product mix, as well as court
decisions, economic conditions and public attitudes. All of these factors can
affect the estimation of reserves.

Establishing loss reserves, including loss reserves for catastrophic events that
have occurred, is an estimation process. Many factors can ultimately affect the
final settlement of a claim and, therefore, the necessary reserve. Changes in
the law, results of litigation, medical costs, the cost of repair materials and
labor rates can all affect ultimate claim costs. In addition, time can be a
critical part of reserving determinations since the longer the span between the
incidence of a loss and the payment or settlement of the claim, the more
variable the ultimate settlement amount can be. Accordingly, short-tail claims,
such as property damage claims, tend to be more reasonably estimable than
long-tail claims, such as general liability and professional liability claims.
Adjustments to prior year reserve estimates, if necessary, are reflected in
operating results in the period that the need for such adjustments is
determined.

Catastrophes are an inherent risk of the property-casualty insurance business
and have contributed to material period-to-period fluctuations in the Company's
results of operations and financial position. The level of catastrophe losses
experienced in any period cannot be predicted and can be material to the results
of operations and/or financial position of the Company.

During 2001, the Company experienced a severe catastrophe loss estimated at $468
million, pretax, net of reinsurance, related to the September 11, 2001 World
Trade Center disaster and related events (WTC event). The loss estimate is based
on a total industry loss of $50 billion and includes all lines of insurance,
including assumed reinsurance. The current estimate takes into account CNA's
substantial ceded reinsurance agreements, including its catastrophe reinsurance
program and corporate reinsurance programs. These loss estimates are subject to
considerable uncertainty. Subsequent developments on claims arising from the WTC
event, as well as the collectibility of reinsurance recoverables, could result
in changes in the total estimated net loss, which could be material to the
Company's results of operations.





                                       84
<PAGE>




The following table provides management's estimate of pretax losses related to
the WTC event on a gross basis (before reinsurance) and a net basis (after
reinsurance) by line of business.

WORLD TRADE CENTER EVENT

<TABLE>
<CAPTION>
                                                                                           GROSS               NET
Year ended December 31, 2001                                                               BASIS              BASIS
(In millions)                                                                           --------------     ---------------
<S>                                                                                    <C>                <C>
Property-casualty assumed reinsurance                                                  $     662          $       465
Property                                                                                     282                  159
Workers compensation                                                                         112                   25
Airline hull                                                                                 194                    6
Commercial auto                                                                                1                    1
                                                                                       --------------     ---------------

Total property-casualty                                                                    1,251                  656
                                                                                       --------------     ---------------

Group                                                                                        322                   60
Life                                                                                          75                   22
                                                                                       --------------     ---------------

Total group and life                                                                         397                   82
                                                                                       --------------     ---------------

Total loss before corporate aggregate reinsurance, reinstatement and additional
  premiums and other                                                                   $   1,648                  738
                                                                                       ==============

Corporate aggregate reinsurance                                                                                  (259)
Reinstatement and additional premiums and other                                                                   (11)
                                                                                                          ---------------

TOTAL                                                                                                     $       468
                                                                                                          ===============
</TABLE>



                                       85
<PAGE>




The table below provides a reconciliation between beginning and ending claim and
claim adjustment expense reserves.

RECONCILIATION OF CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES
<TABLE>
<CAPTION>
As of and for the years ended December 31                                       2001            2000             1999
(In millions)                                                               ------------    ------------     -------------
<S>                                                                         <C>             <C>              <C>
Reserves, beginning of year:
  Gross                                                                       $ 26,408         $ 26,631         $ 28,317
  Ceded                                                                          7,568            6,273            5,424
                                                                              --------         --------         --------

Net reserves, beginning of year                                                 18,840           20,358           22,893
                                                                              --------         --------         --------

Net reserves transferred under retroactive reinsurance agreements                    -                -           (1,024)
Net reserves transferred to CNAGLAC*                                            (1,055)               -                -
                                                                              --------         --------         --------

Total net adjustments                                                           (1,055)               -           (1,024)
                                                                              --------         --------         --------

Net incurred claim and claim adjustment expenses:
  Provision for insured events of current year                                   7,192            6,331            7,287
  Increase in provision for insured events of prior years                        2,466              427            1,027
  Amortization of discount                                                         107              158              139
                                                                              --------         --------         --------

Total net incurred                                                               9,765            6,916            8,453
                                                                              --------         --------         --------

Net payments attributable to:
  Current year events                                                            2,111            1,888            2,744
  Prior year events                                                              7,936            6,916            7,460
  Reinsurance recoverable against net reserve transferred under
    retroactive reinsurance agreements (See Note P)                               (250)            (370)            (240)
                                                                              --------         --------         --------

Total net payments                                                               9,797            8,434            9,964
                                                                              --------         --------         --------

Net reserves, end of year                                                       17,753           18,840           20,358
Ceded reserves, end of year                                                     11,798            7,568            6,273
                                                                              --------         --------         --------

GROSS RESERVES, END OF YEAR**                                                 $ 29,551         $ 26,408         $ 26,631
                                                                              ========         ========         ========
</TABLE>

*Effective on January 1, 2001, CNA established a new life insurance company,
CNAGLAC. Approximately $1,055 million of accident and health reserves were
transferred from CCC to CNAGLAC on January 1, 2001.

**Excludes life claim and claim adjustment expense reserves of $1,715 million
and $554 million at December 31, 2001 and 2000, included in the Consolidated
Balance Sheets.

The increase (decrease) in provision for insured events of prior years (reserve
development) is composed of the following components.

RESERVE DEVELOPMENT

<TABLE>
<CAPTION>
Years ended December 31                                                        2001                 2000                 1999
(In millions)                                                              ------------         -------------        -------------

<S>                                                                        <C>                  <C>                  <C>
Environmental pollution and other mass tort                                   $   473             $    17              $   (84)
Asbestos                                                                          772                  65                  560
Other                                                                           1,221                 345                  551
                                                                              -------             -------              -------

TOTAL                                                                         $ 2,466             $   427              $ 1,027
                                                                              =======             =======              =======
</TABLE>







                                       86
<PAGE>




ENVIRONMENTAL POLLUTION AND OTHER MASS TORT AND ASBESTOS RESERVES (APMT)

CNA's property-casualty insurance subsidiaries have potential exposures related
to environmental pollution and other mass tort and asbestos claims.

The following table provides data related to CNA's environmental pollution and
other mass tort and asbestos claim and claim adjustment expense reserves.

ENVIRONMENTAL POLLUTION AND OTHER MASS TORT AND ASBESTOS
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 2001               December 31, 2000
                                                     ------------------------------- -------------------------------
                                                      ENVIRONMENTAL                    ENVIRONMENTAL
                                                        POLLUTION                        POLLUTION
                                                        AND OTHER                        AND OTHER
                                                        MASS TORT      ASBESTOS          MASS TORT      ASBESTOS
                                                     --------------- --------------- --------------- ---------------
(In millions)
<S>                                                  <C>             <C>             <C>             <C>
Gross reserves                                       $         820   $       1,590   $         493   $         848
Ceded reserves                                                (203)           (386)           (146)           (245)
                                                     --------------- --------------- --------------- ---------------
NET RESERVES                                         $         617   $       1,204   $         347   $         603
                                                     =============== =============== =============== ===============
</TABLE>


Environmental pollution cleanup is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to cleanup. The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial interpretations in many cases have expanded
the scope of coverage and liability beyond the original intent of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of 1980
(Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup
and restoration of toxic waste sites and formalize the concept of legal
liability for cleanup and restoration by "Potentially Responsible Parties"
(PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for
cleanup of waste sites if PRPs fail to do so, and to assign liability to PRPs.
The extent of liability to be allocated to a PRP is dependent upon a variety of
factors. Further, the number of waste sites subject to cleanup is unknown. To
date, approximately 1,500 cleanup sites have been identified by the
Environmental Protection Agency (EPA) and included on its National Priorities
List (NPL). State authorities have designated many cleanup sites as well.

Many policyholders have made claims against various CNA insurance subsidiaries
for defense costs and indemnification in connection with environmental pollution
matters. These claims relate to accident years 1989 and prior, which coincides
with CNA's adoption of the Simplified Commercial General Liability coverage
form, which includes what is referred to in the industry as an "absolute
pollution exclusion." CNA and the insurance industry are disputing coverage for
many such claims. Key coverage issues include whether cleanup costs are
considered damages under the policies, trigger of coverage, allocation of
liability among triggered policies, applicability of pollution exclusions and
owned property exclusions, the potential for joint and several liability and the
definition of an occurrence. To date, courts have been inconsistent in their
rulings on these issues.


A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress during 2001, and it is unclear what
positions Congress or the administration will take and what legislation, if any,
will result in the future. If there is legislation, and in some circumstances
even if there is no legislation, the federal role in environmental cleanup may
be significantly reduced in favor of state action. Substantial changes in the
federal statute or the activity of the EPA may cause states to reconsider their





                                       87
<PAGE>

environmental cleanup statutes and regulations. There can be no meaningful
prediction of the pattern of regulation that would result or the effect upon
CNA's results of operations and/or financial position.

Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to cleanup, and the
standards for cleanup and liability, the ultimate liability of CNA for
environmental pollution claims may vary substantially from the amount currently
recorded.

As of December 31, 2001 and 2000, CNA carried approximately $617 million and
$347 million of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and other mass
tort claims. Unfavorable environmental pollution and other mass tort net claim
and claim adjustment expense reserve development for the years ended December
31, 2001 and 2000 amounted to $473 million and $17 million. Favorable
environmental pollution and other mass tort net claim and claim adjustment
expense reserve development for the year ended December 31, 1999 amounted to $84
million. The Company made environmental pollution-related claim payments and
other mass tort-related claim payments, net of reinsurance recoveries, of $203
million, $135 million and $236 million during the years ended December 31, 2001,
2000 and 1999.

The reserve development during 2001 for environmental pollution and other mass
tort reserves was due to reviews completed during the year, which indicated that
paid and reported losses were higher than expectations based on prior reviews.
Factors that have led to this development include a number of declaratory
judgments filed this year due to an increasingly favorable legal environment for
policyholders in certain courts and other unfavorable decisions regarding
cleanup issues.

CNA's property-casualty insurance subsidiaries also have exposure to
asbestos-related claims. Estimation of asbestos-related claim and claim
adjustment expense reserves involves many of the same limitations discussed
above for environmental pollution claims, such as inconsistency of court
decisions, specific policy provisions, allocation of liability among insurers
and insureds, and additional factors such as missing policies and proof of
coverage. Furthermore, estimation of asbestos-related claims is difficult due
to, among other reasons, the proliferation of bankruptcy proceedings and
attendant uncertainties, the targeting of a broader range of businesses and
entities as defendants, the uncertainty as to which other insureds may be
targeted in the future and the uncertainties inherent in predicting the number
of future claims.

As of December 31, 2001 and 2000, CNA carried approximately $1,204 million and
$603 million of net claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported asbestos-related claims.
Unfavorable asbestos-related net claim and claim adjustment expense reserve
development for the years ended December 31, 2001, 2000 and 1999 amounted to
$772 million, $65 million and $560 million. The Company made asbestos-related
claim payments, net of reinsurance, of $171 million, $126 million and $161
million during the years ended December 31, 2001, 2000 and 1999, excluding
payments made in connection with the 1993 settlement of litigation related to
Fibreboard Corporation. CNA has attempted to manage its asbestos-related
exposures by aggressively resolving old accounts.

The reserve development during 2001 for asbestos-related claims was based on a
management review of developments with respect to these exposures conducted
during the year. This analysis indicated a significant increase in claim counts
for asbestos-related claims. The factors




                                       88
<PAGE>

that have led to the deterioration in claim counts include, among other things,
intensive advertising campaigns by lawyers for asbestos claimants and the
addition of new defendants such as the distributors and installers of products
containing asbestos. New claim filings increased significantly in 2000 over
1999, and that trend continued during 2001. The volume of new claims has caused
the bankruptcies of numerous asbestos defendants. Those bankruptcies also may
result in increased liability for remaining defendants under principles of joint
and several liability.

In addition, some asbestos-related defendants have asserted that their claims
for insurance are not subject to aggregate limits on coverage. CNA currently has
such claims from a number of insureds. Some of these claims involve insureds
facing exhaustion of products liability aggregate limits in their policies, who
have asserted that their asbestos-related claims fall within so-called
"non-products" liability coverage contained within their policies rather than
products liability coverage, and that the claimed "non-products" coverage is not
subject to any aggregate limit. It is difficult to predict the ultimate size of
any of the claims for coverage not subject to aggregate limits or predict to
what extent, if any, the attempts to assert "non-products" claims outside the
products liability aggregate will succeed.

Due to the uncertainties created by volatility in claim numbers and settlement
demands, the effect of bankruptcies, the extent to which non-impaired claimants
can be precluded from making claims and the efforts by insureds to obtain
coverage not subject to aggregate limits, the ultimate liability of CNA for
asbestos-related claims may vary substantially from the amount currently
recorded. Other variables that will influence CNA's ultimate exposure to
asbestos-related claims include medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix of
asbestos-related diseases presented and the possibility of legislative reform.
Adverse developments with respect to such matters discussed herein could have a
material adverse effect on CNA's results of operations and/or financial
condition.

The results of operations and financial condition of CNA in future years may
continue to be adversely affected by environmental pollution and other mass tort
and asbestos claim and claim adjustment expenses. Management will continue to
review and monitor these liabilities and make further adjustments, including the
potential for further reserve strengthening, as warranted.

OTHER RESERVES

Unfavorable net claim and claim adjustment expense reserve development for other
reserves in 2001 of $1,221 million resulted from several coverages provided to
commercial entities underwritten by several segments of CNA.

Approximately $230 million of the adverse loss development is a result of
several coverages provided to commercial entities. Reserve analyses performed
during 2001 showed unexpected increases in the size of claims for several lines,
including commercial automobile liability, general liability and the liability
portion of commercial multiple-peril coverages. In addition, the number of
commercial automobile liability claims was higher than expected and several
state-specific factors resulted in higher than anticipated losses, including
developments associated with commercial automobile liability coverage in Ohio
and general liability coverage provided to contractors in New York.



                                       89
<PAGE>

An analysis of assumed reinsurance business showed that the paid and reported
losses for recent accident years were higher than expectations, which resulted
in management recording net unfavorable development on prior year loss reserves
of approximately $690 million.

Approximately $300 million of adverse loss development was due to adverse
experience in all other lines, primarily in coverages provided to
healthcare-related entities. The level of paid and reported losses associated
with coverages provided to national long-term care facilities were higher than
expected. In addition, the average size of claims resulting from coverages
provided to physicians and institutions providing healthcare-related services
increased more than expected.

Unfavorable net claim and claim adjustment expense reserve development for other
reserves in 2000 of $345 million was due to unfavorable loss experience in
standard commercial lines, assumed reinsurance and accident and health lines.
These unfavorable changes were partially offset by favorable development in
non-medical professional liability and other casualty lines. The unfavorable
development in standard commercial lines can be attributed to adverse claim
experience for recent accident years in the commercial auto liability,
commercial multi-peril and workers compensation lines of business. The
unfavorable development in the assumed reinsurance and accident and health lines
also resulted from adverse claims experience.

Unfavorable net claim and claim adjustment expense reserve development for other
reserves in 1999 of $551 million was due to unfavorable loss development of
approximately $540 million for standard commercial lines, approximately $60
million for medical malpractice and approximately $70 million for accident and
health. These unfavorable changes were partially offset by favorable development
of approximately $120 million in non-medical professional liability and assumed
reinsurance on older accident years. The unfavorable development in standard
commercial lines was due to commercial automobile liability and workers
compensation losses being higher than expected in recent accident years. In
addition, the number of claims reported for commercial multiple-peril liability
claims from older accident years did not decrease as much as expected. The
unfavorable development for medical malpractice was also due to losses being
higher than expected for recent accident years. The accident and health
unfavorable development was due to higher than expected claim reporting on
assumed personal accident coverage in recent accident years.

CNA's insurance subsidiaries also have exposure to construction defect losses,
principally in its general liability and commercial multiple-peril lines. This
exposure relates to claims involving property damage alleging loss of use,
damage, destruction or deterioration of land, buildings and other structures
involving new construction or major rehabilitation of real property. Many of
these claims involve multiple defects and multiple defendants. The majority of
losses have been concentrated in a limited number of states, including
California. The Company has taken several underwriting actions to mitigate this
exposure in the future. Estimation of construction defect losses is subject to a
high level of uncertainty due to the long period of time between the accident
date and the reporting of the claim, emerging case law, changing regulatory
rules and the allocation of damages to the multiple defendants. Due to the
inherent uncertainties noted above, the ultimate liability for construction
defect claims may vary substantially from the amount currently recorded.


FINANCIAL GUARANTEE RESERVES

CNA, through reinsurance assumed contracts, provides financial guarantees to
issuers of asset-backed securities, motion picture finance and money market
funds. Premiums are received




                                       90
<PAGE>

throughout the exposure period and are recognized as revenue in proportion to
the underlying risk insured. In addition, through August 1, 1989, CNA's
property-casualty subsidiaries wrote financial guarantee insurance in the form
of surety bonds and also insured equity policies. These bonds represented
primarily industrial development bond guarantees and, in the case of insured
equity policies, typically extended in initial terms from 10 to 13 years. For
these guarantees and policies CNA received an advance premium that is recognized
over the exposure period and in proportion to the underlying risk insured.


As of December 31, 2001 and 2000, gross exposure on assumed financial guarantee
insurance contracts, credit enhancement products, financial guarantee surety
bonds and insured equity policies was approximately $82 million and $335
million. The degree of risk to CNA related to this exposure is substantially
reduced through reinsurance, diversification of exposures and collateral
requirements. In addition, security interests in improved real estate are also
commonly obtained on these risks. Approximately 26% and 29% of the risks were
ceded to reinsurers at December 31, 2001 and 2000. Total exposure, net of
reinsurance, amounted to $61 million and $237 million as of December 31, 2001
and 2000. At December 31, 2001 and 2000, collateral consisting of letters of
credit, cash reserves and debt service reserves amounted to $6 million and $7
million.


Gross unearned premium reserves for these contracts were $2 million and $11
million at December 31, 2001 and 2000. Gross claim and claim adjustment expense
reserves totaled $103 million and $127 million as of December 31, 2001 and 2000.


NOTE G. LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES

TOBACCO LITIGATION

Four CNA insurance subsidiaries are defendants in a lawsuit arising out of
policies allegedly issued to Liggett Group, Inc. (Liggett). The lawsuit was
filed by Liggett and its current parent, Brooke Group Holding Inc., in the
Delaware Superior Court, New Castle County, on January 26, 2000. The lawsuit,
which involves numerous insurers, concerns coverage issues relating to over
1,000 tobacco-related claims asserted against Liggett over the past 20 years.
However, Liggett only began submitting claims for coverage under the policies in
January 2000. The trial court granted the CNA insurance subsidiaries' summary
judgment motions asserting that they have no duty to defend or to indemnify as
to a number of representative lawsuits. The Delaware Supreme Court has accepted
an appeal of these rulings. CNA believes its coverage defenses are strong;
therefore, based on facts and circumstances currently known, management believes
that the ultimate outcome of the pending litigation will not materially affect
the results of operations and/or financial position of CNA.


IGI CONTINGENCY

In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an
arrangement with IOA Global, Ltd. (IOA), an independent managing general agent
based in Philadelphia, Pennsylvania, to develop and manage a book of accident
and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies,
Ltd. (IGI), a personal accident reinsurance managing general underwriter, was
appointed to underwrite and market the book under the supervision of IOA.
Between April 1, 1997 and December 1, 1999, IGI underwrote a number of
reinsurance arrangements with respect to personal accident insurance worldwide
(the IGI Program). Under various arrangements, CNA Re Ltd. both assumed risks as
a reinsurer and




                                       91
<PAGE>

also ceded a substantial portion of those risks to other companies, including
other CNA insurance subsidiaries and ultimately to a group of reinsurers
participating in a reinsurance pool known as the Associated Accident and Health
Reinsurance Underwriters (AAHRU) Facility. CNA's Group Operations business unit
participated as a pool member in the AAHRU Facility in varying percentages
between 1997 and 1999.

CNA has determined that a small portion of the premiums assumed under the IGI
Program related to United States workers compensation "carve-out" business. CNA
is aware that a number of reinsurers with workers compensation carve-out
insurance exposure have disavowed their obligations under various legal
theories. If one or more such companies are successful in avoiding or reducing
their liabilities, then it is likely that CNA's liability will also be reduced.
Moreover, based on information known at this time, CNA reasonably believes it
has strong grounds for avoiding a substantial portion of its United States
workers compensation carve-out exposure through legal action.

As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. CNA believes it has valid and enforceable
reinsurance contracts with the AAHRU Facility and other reinsurers with respect
to the IGI Program, including the United States workers compensation carve-out
business. However, certain reinsurers dispute their liabilities to CNA, and CNA
has commenced arbitration proceedings against such reinsurers.

CNA has established reserves for its estimated exposure under the program and an
estimate for recoverables from retrocessionaires.

The Company is pursuing a number of loss mitigation strategies. Although the
results of these various actions to date support the recorded reserves, the
estimate of ultimate losses is subject to considerable uncertainty. As a result
of these uncertainties, the results of operations in future years may be
adversely affected by potentially significant reserve additions. Management does
not believe that any such reserve additions will be material to the equity of
the Company.


OTHER LITIGATION

CNAF and its subsidiaries are also parties to other litigation arising in the
ordinary course of business. The outcome of such other litigation will not, in
the opinion of management, materially affect the results of operations and/or
financial position of CNA.


NOTE H.  REINSURANCE

CNA assumes and cedes reinsurance with other insurers and reinsurers and members
of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of risk,
minimize exposures on larger risks and to exit certain lines of business.
Reinsurance coverages are tailored to the specific risk characteristics of each
product line and CNA's retained amount varies by type of coverage. Generally,
property risks are reinsured on an excess of loss, per risk basis. Liability
coverages are generally reinsured on a quota share basis in excess of CNA's
retained risk. CNA's life reinsurance includes utilization of coinsurance,
yearly renewable term and facultative programs. A majority of the reinsurance
utilized by the Company's life insurance operations relates to term life
insurance policies. Term life insurance policies issued from 1994 onward are
generally ceded at 60%-90% of the face value from first dollar. Universal Life
policies issued from 1998 onward are generally ceded at 75% of the face value
from first dollar.




                                       92
<PAGE>

The Company's overall reinsurance program includes certain property-casualty
contracts, such as the corporate aggregate treaties discussed in more detail
later in this section, that are entered into and accounted for on a "funds
withheld" basis. Under these contracts, the Company records a funds withheld
liability, which is included in reinsurance balances payable, for substantially
all of the ceded premiums. These reinsurance contracts require the Company to
increase the funds withheld balance at stated interest crediting rates. The
funds withheld liability is reduced by any cumulative claim payments made by the
Company in excess of the Company's retention under the reinsurance contract. If
the funds withheld liability is exhausted, additional claim payments are
recoverable from the reinsurer.

Interest cost on these contracts, which is included in other net investment
income, was $241 million, $87 million and $22 million in 2001, 2000 and 1999.
The amount subject to interest crediting rates on such contracts was $2,724
million and $522 million at December 31, 2001 and 2000.

The ceding of insurance does not discharge the primary liability of the Company.
Therefore, a credit exposure exists with respect to property, liability and life
reinsurance ceded to the extent that any reinsurer is unable to meet the
obligations assumed under reinsurance agreements.

Amounts receivable from reinsurers were $13,823 million and $9,397 million at
December 31, 2001 and 2000. Of these amounts, $838 million and $821 million were
billed to reinsurers as of December 31, 2001 and 2000, as reinsurance contracts
generally require payment of claims by the ceding company before the amount can
be billed to the reinsurer. The remaining receivable relates to the estimated
case and IBNR reserves and future policyholder benefits ceded under reinsurance
contracts.

The Company attempts to mitigate its credit risk related to reinsurance by
entering into reinsurance arrangements only with reinsurers that have credit
ratings above certain levels and by obtaining substantial amounts of collateral.
The primary methods of obtaining collateral are through reinsurance trusts,
letters of credit and funds withheld balances. Such collateral was approximately
$3,677 million and $1,566 million at December 31, 2001 and 2000. The allowance
for doubtful accounts related to reinsurance receivables was $170 million and
$179 million at December 31, 2001 and 2000.

CNA's largest recoverables from a single reinsurer at December 31, 2001,
including prepaid reinsurance premiums, were approximately $1,487 million,
$1,374 million, $889 million, and $463 million, from The subsidiaries of
Hannover Reinsurance (Ireland) LTD., subsidiaries of The Allstate Corporation
(Allstate), American Reinsurance Company, and European Reinsurance Company of
Zurich.

Insurance claims and policyholders' benefits reported in the Consolidated
Statements of Operations are net of reinsurance recoveries of $7,288 million,
$4,863 million and $3,224 million for 2001, 2000 and 1999.

Life premiums are primarily from long duration contracts and property-casualty
premiums and accident and health premiums are primarily from short duration
contracts.





                                       93
<PAGE>




The effects of reinsurance on earned premiums and written premiums for the years
ended December 31, 2001, 2000 and 1999 are shown in the following tables.

COMPONENTS OF EARNED PREMIUMS

<TABLE>
<CAPTION>
                                                                                                         ASSUMED/
                                        DIRECT          ASSUMED           CEDED             NET            NET %
                                    --------------   ---------------   -------------   -------------  --------------
(In millions)
<S>                                 <C>              <C>               <C>             <C>            <C>
2001 EARNED PREMIUMS
Property-casualty                      $ 8,708           $ 1,228           $ 4,983         $ 4,953            24.8%
Accident and health                      3,644               176               136           3,684             4.8
Life                                     1,256               217               745             728            29.8
                                       -------           -------           -------         -------         -------


TOTAL EARNED PREMIUMS                  $13,608           $ 1,621           $ 5,864         $ 9,365            17.3%
                                       =======           =======           =======         =======         =======

2000 EARNED PREMIUMS
Property-casualty                      $ 8,389           $ 1,955           $ 3,421         $ 6,923            28.2%
Accident and health                      3,644               484               487           3,641            13.3
Life                                     1,227               220               537             910            24.2
                                       -------           -------           -------         -------         -------

TOTAL EARNED PREMIUMS                  $13,260           $ 2,659           $ 4,445         $11,474            23.2%
                                       =======           =======           =======         =======         =======

1999 EARNED PREMIUMS
Property-casualty                      $ 9,158           $ 1,816           $ 2,199         $ 8,775            20.7%
Accident and health                      3,730               198               397           3,531             5.6
Life                                     1,174               222               420             976            22.7
                                       -------           -------           -------         -------         -------

TOTAL EARNED PREMIUMS                  $14,062           $ 2,236           $ 3,016         $13,282            16.8%
                                       =======           =======           =======         =======         =======
</TABLE>



COMPONENTS OF WRITTEN PREMIUMS

<TABLE>
<CAPTION>
                                                                                                         ASSUMED/
                                        DIRECT          ASSUMED           CEDED             NET            NET %
                                    --------------   ---------------   -------------   -------------  --------------
(In millions)
<S>                                 <C>              <C>               <C>             <C>            <C>
2001 WRITTEN PREMIUMS
Property-casualty                      $ 9,132           $ 1,435           $ 5,173         $ 5,394            26.6%
Accident and health                      3,637               193               137           3,693             5.2
Life                                     1,259               217               745             731            29.7
                                       -------           -------           -------         -------         -------

TOTAL WRITTEN PREMIUMS                 $14,028           $ 1,845           $ 6,055         $ 9,818            18.8%
                                       =======           =======           =======         =======         =======

2000 WRITTEN PREMIUMS
Property-casualty                      $ 8,412           $ 1,787           $ 3,444         $ 6,755            26.5%
Accident and health                      3,598               468               489           3,577            13.1
Life                                     1,229               220               537             912            24.1
                                       -------           -------           -------         -------         -------

TOTAL WRITTEN PREMIUMS                 $13,239           $ 2,475           $ 4,470         $11,244            22.0%
                                       =======           =======           =======         =======         =======

1999 WRITTEN PREMIUMS
Property-casualty                      $ 9,114           $ 1,948           $ 3,262         $ 7,800            25.0%
Accident and health                      3,731               194               403           3,522             5.5
Life                                     1,158               196               461             893            21.9
                                       -------           -------           -------         -------         -------

TOTAL WRITTEN PREMIUMS                 $14,003           $ 2,338           $ 4,126         $12,215            19.1%
                                       =======           =======           =======         =======         =======
</TABLE>






                                       94
<PAGE>




The impact of reinsurance on life insurance inforce at December 31, 2001, 2000
and 1999 is shown in the following table.

COMPONENTS OF LIFE INSURANCE IN-FORCE

<TABLE>
<CAPTION>
                                                         DIRECT         ASSUMED         CEDED           NET
                                                     -------------- -------------- -------------- --------------
(In millions)
<S>                                                  <C>            <C>            <C>            <C>
  2001                                                 $395,167         $102,564       $331,156       $166,575
  2000                                                  391,847          142,934        363,893        170,888
  1999                                                  339,255          130,735        184,376        285,614
</TABLE>




In 1999, the Company entered into an aggregate reinsurance treaty related to the
1999 through 2001 accident years covering substantially all of the Company's
property-casualty lines of business (the Aggregate Cover). The Company has two
sections of coverage under the terms of the Aggregate Cover. These coverages
attach at defined loss and allocated loss adjustment expense (collectively,
losses) ratios for each accident year. Coverage under the first section of the
Aggregate Cover, which is available for all accident years covered by the
contract, has annual limits of $500 million of ceded losses with an aggregate
limit of $1 billion of ceded losses for the three year period. The ceded
premiums are a percentage of ceded losses and for each $500 million of limit the
ceded premium is $230 million. The second section of the Aggregate Cover, which
is only available for accident year 2001, provides additional coverage of up to
$510 million of ceded losses for a maximum ceded premium of $310 million. Under
the Aggregate Cover, interest charges on the funds withheld accrue at 8% per
annum. If the aggregate loss ratio for the three-year period exceeds certain
thresholds, additional premiums may be payable and the rate at which interest
charges are accrued would increase to 8.25% per annum.


The coverage under the second section of the Aggregate Cover was triggered for
the 2001 accident year. As a result of losses related to the WTC event, the
limit under this section was exhausted. Additionally, as a result of the
significant reserve additions recorded during 2001, the $500 million limit on
the 1999 accident year under the first section was also fully utilized. No
losses have been ceded to the remaining $500 million of limit on accident years
2000 and 2001 under the first section.


The impact of the Aggregate Cover on pretax operating results was as follows:

IMPACT OF AGGREGATE COVER ON PRETAX OPERATING RESULTS
<TABLE>
<CAPTION>
Year ended December 31                                                                                     2001
(In millions)                                                                                        ---------------
<S>                                                                                                  <C>
Ceded earned premium                                                                                 $        (543)
Ceded claim and claim adjustment expenses                                                                    1,010
Interest charges                                                                                               (81)
                                                                                                     ---------------

PRETAX BENEFIT ON OPERATING RESULTS                                                                  $         386
                                                                                                     ===============
</TABLE>




In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property-casualty
lines of business in the Continental Casualty Company Pool (the CCC Cover). The
loss protection provided by the CCC Cover has an aggregate limit of
approximately $760 million of ceded losses. The CCC Cover provides continuous
coverage in excess of the second section of the Aggregate Cover discussed above.
Under the CCC Cover, interest charges on the funds withheld generally accrue at
8% per




                                       95
<PAGE>

annum. The interest rate increases to 10% per annum if the aggregate loss ratio
exceeds certain thresholds.


The impact of the CCC Cover on pretax operating results was as follows:

IMPACT OF CCC COVER ON PRETAX OPERATING RESULTS

<TABLE>
<CAPTION>
Year ended December 31                                                                                    2001
(In millions)                                                                                        ---------------
<S>                                                                                                  <C>
Ceded earned premiums                                                                                $        (260)
Ceded claim and claim adjustment expenses                                                                      470
Interest charges                                                                                               (20)
                                                                                                     ---------------

PRETAX BENEFIT ON OPERATING RESULTS                                                                  $         190
                                                                                                     ===============
</TABLE>


NOTE I. DEBT

Debt is composed of the following obligations.

DEBT

<TABLE>
<CAPTION>
December 31                                                                                2001                  2000
(In millions)                                                                          --------------       ---------------
<S>                                                                                    <C>                  <C>
Variable rate debt:
  Commercial Paper                                                                        $    -                $  627
  Credit facility - CNAF                                                                     500                     -
  Credit facility - CNA Surety                                                                75                   100
Senior notes:
  7.250%, due March 1, 2003                                                                  133                   133
  6.250%, due November 15, 2003                                                              250                   249
  6.500%, due April 15, 2005                                                                 491                   491
  6.750%, due November 15, 2006                                                              249                   249
  6.450%, due January 15, 2008                                                               149                   149
  6.600%, due December 15, 2008                                                              199                   199
  8.375%, due August 15, 2012                                                                 68                    68
  6.950%, due January 15, 2018                                                               148                   148
Debenture, 7.250%, due November 15, 2023                                                     240                   240
Capital leases, 8.000%-19.980%, due through December 31, 2011                                 38                    40
Other debt, 1.000%-8.500%, due through 2019                                                   27                    36
                                                                                          ------                ------

TOTAL DEBT                                                                                $2,567                $2,729
                                                                                          ======                ======
</TABLE>




During 2001, the Company discontinued its commercial paper program and repaid
all loans outstanding under the program. The weighted-average interest rate on
commercial paper was 7.24% at December 31, 2000.

The funds used to retire the outstanding commercial paper debt were obtained
through the draw down of the full amount available under the Company's $500
million revolving credit facility. The facility is composed of two parts: a $250
million component with a 364-day expiration date (with an option enabling CNAF
to convert borrowings into a one-year term loan) and a $250 million component
with a three-year expiration date.

The Company pays a facility fee to the lenders for having funds available for
loans under both components of the facility. The fee varies based on the
long-term debt ratings of the Company.




                                       96
<PAGE>

At December 31, 2001, the facility fee on the 364-day component was 15 basis
points and the facility fee on the three-year component was 17.5 basis points.

In addition to the facility fees, the Company pays interest on any outstanding
debt/borrowings under the facility based on a rate determined using the
long-term debt ratings of the Company. The interest rate is equal to the London
Interbank Offering Rate (LIBOR) plus 60 basis points for the 364-day component
and LIBOR plus 57.5 basis points for the three-year component. Further, if the
Company has outstanding loans greater than 50% of the amounts available under
the facility, the Company also will pay a utilization fee of 12.5 basis points
on such loans. At December 31, 2001, the weighted-average interest rate on the
borrowings under the facility, including facility fees and utilization fees, was
3.06%.

A Moody's Investors Service (Moody's) downgrade of the CNAF senior debt rating
from Baa2 to Baa3 would increase the facility fee on the 364-day component of
the facility from 15 basis points to 20 basis points, and the facility fee on
the three-year component would increase from 17.5 basis points to 25 basis
points. The applicable interest rate on the 364-day component would increase
from LIBOR plus 60 basis points to LIBOR plus 80 basis points and the applicable
interest rate on the three-year component would increase from LIBOR plus 57.5
basis points to LIBOR plus 75 basis points. The utilization fee would remain
unchanged on both components at 12.5 basis points.

The $500 million revolving credit facility replaced CNAF's $750 million
revolving credit facility (the Prior Facility), which was scheduled to expire on
May 10, 2001. No loans were outstanding under the Prior Facility anytime during
2001 or at December 31, 2000. To offset the variable rate characteristics of the
Prior Facility and the interest rate risk associated with periodically reissuing
commercial paper, CNA was party to interest rate swap agreements with several
banks. While no agreements were entered into for the year ended December 31,
2001, there were agreements in place during 2000 and 1999. These agreements
required CNA to pay interest at a fixed rate in exchange for the receipt of the
three-month LIBOR. The effect of the interest rate swap agreements was to
decrease interest expense by approximately $2 million for the year ended
December 31, 2000 and increase interest expense by $4 million for the year ended
December 31, 1999.

The combined weighted-average interest rate of all short-term debt, including
facility fees and commercial paper borrowings, was 7.36% at December 31, 2000.

During 2000, the Company repaid bank loans drawn under the CNA credit facility
and repurchased approximately $38 million of its senior notes.

CNA Surety Corporation (CNA Surety), a 64% owned subsidiary of the Company, has
a $130 million revolving credit facility that expires on September 30, 2002. The
interest rate on facility borrowings is based on LIBOR plus 20 basis points.
Additionally, there is an annual facility fee of 10 basis points on the entire
facility. The weighted-average interest rate on the borrowings under this
facility, including facility fees, at December 31, 2001 and 2000 was 2.61% and
6.99%.

The terms of both CNAF and CNA Surety's credit facilities require the respective
company to maintain certain financial ratios and combined property-casualty
company statutory surplus levels. At December 31, 2001 and 2000, both CNAF and
CNA Surety were in compliance with all restrictive debt covenants.





                                       97
<PAGE>

The combined aggregate maturities for debt at December 31, 2001 are presented in
the following table.
<TABLE>
<CAPTION>
MATURITY OF DEBT
(In millions)
<S>                                                         <C>
2002                                                        $   329
2003                                                            387
2004                                                            254
2005                                                            496
2006                                                            254
Thereafter                                                      859
Less original issue discount                                    (12)
                                                            -------

TOTAL                                                       $ 2,567
                                                            =======
</TABLE>

NOTE J. BENEFIT PLANS

PENSION AND POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFIT PLANS

CNAF and certain subsidiaries sponsor noncontributory pension plans typically
covering full-time employees age 21 or over who have completed at least one year
of service. While the terms of the plans vary, benefits are generally based on
years of credited service and the employee's highest 60 consecutive months of
compensation.

CNA's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plans are invested
primarily in U.S. government securities with the balance in mortgage-backed
securities, equity investments and short-term investments.

CNA provides certain healthcare and life insurance benefits to eligible retired
employees, their covered dependents and their beneficiaries. The funding for
these plans is generally to pay covered expenses as they are incurred.

In 2000, employees of CCC (approximately 79% of CNA's employees) who were
employed at December 31, 1999, and were still employed at April 24, 2000, were
required to make a choice regarding their continued participation in the defined
benefit pension plan. These employees were given two choices: 1) to continue
earning additional benefits in the defined benefit pension plan or 2) to convert
the present value of their accrued benefit in the pension plan to an "accrued
pension account" (APA) that would be credited with interest at the 30-year
Treasury rate and to receive enhanced employer contributions to the Savings and
Capital Accumulation Plan (S-CAP) (see Savings Plan discussion below).
Approximately 60% of eligible employees elected the latter choice, resulting in
a curtailment charge of approximately $13 million, before income taxes.
Additionally, this change in benefit plan participation resulted in a reduction
of the pension benefit obligation of $37 million at December 31, 2000.





                                       98
<PAGE>




The following table provides a reconciliation of benefit obligations.

BENEFIT OBLIGATIONS AND ACCRUED BENEFIT COSTS
<TABLE>
<CAPTION>
                                                               PENSION BENEFITS          POSTRETIREMENT BENEFITS
                                                         ----------------------------- -----------------------------
                                                             2001           2000           2001           2000
                                                         -------------- -------------- -------------- --------------
(In millions)
<S>                                                      <C>            <C>            <C>            <C>
Benefit obligation at January 1                              $ 1,882        $ 1,815        $   313        $   268

Changes in benefit obligation:
  Service cost                                                    38             31              6              7
  Interest cost                                                  138            131             23             22
  Participants' contributions                                      -              -              5              4
  Plan amendments                                                  -             (1)             -             (1)
  Actuarial loss                                                 130             62             39             41
  Curtailment                                                     (1)           (37)            (7)             -
  Benefits paid                                                 (132)          (119)           (31)           (28)
                                                             -------        -------        -------        -------

Benefit obligations at December 31                             2,055          1,882            348            313
                                                             -------        -------        -------        -------

Fair value of plan assets at January 1                         1,684          1,452              -              -
Change in plan assets:
  Actual return on plan assets                                   148            213              -              -
  Company contributions                                          144            138             25             24
  Participants' contributions                                      -              -              6              4
  Benefits paid                                                 (132)          (119)           (31)           (28)
                                                             -------        -------        -------        -------

Fair value of plan assets at December 31                       1,844          1,684              -              -
                                                             -------        -------        -------        -------

  Funded status                                                 (211)          (198)          (348)          (313)
  Unrecognized net actuarial loss                                217            105            109             80
  Unrecognized prior service cost (benefit)                       16             20            (97)          (116)
                                                             -------        -------        -------        -------

Prepaid (accrued) benefit cost                               $    22        $   (73)       $  (336)       $  (349)
                                                             =======        =======        =======        =======

Amounts recognized in the Consolidated Balance Sheets:
    Prepaid benefit cost                                     $    84        $     -        $     -        $     -
    Accrued benefit liability                                    (86)           (73)          (336)          (349)
    Accumulated other comprehensive income                        24              -              -              -
                                                             -------        -------        -------        -------

Prepaid (accrued) benefit cost                               $    22        $   (73)       $  (336)       $  (349)
                                                             =======        =======        =======        =======
</TABLE>







                                       99
<PAGE>




The components of net periodic benefit costs are presented in the following
table.

BENEFIT OBLIGATIONS AND ACCRUED BENEFIT COSTS

<TABLE>
<CAPTION>
Years ended December 31                                                      2001             2000              1999
(In millions)                                                            ------------     ------------     --------------
<S>                                                                      <C>              <C>              <C>
PENSION BENEFITS
Service cost                                                                 $  38            $  31               $  64
Interest cost on projected benefit obligation                                  138              131                 129
Expected return on plan assets                                                (134)            (120)               (100)
Prior service cost amortization                                                  3                3                   6
Actuarial loss                                                                   2                1                   8
Curtailment loss                                                                 3               13                   8
                                                                             -----            -----               -----
NET PERIODIC PENSION COST                                                    $  50            $  59               $ 115
                                                                             =====            =====               =====

POSTRETIREMENT BENEFITS
Service cost                                                                 $   6            $   7               $  11
Interest cost on projected benefit obligation                                   23               22                  22
Prior service cost amortization                                                (16)             (16)                (13)
Actuarial loss                                                                   3                2                   3
Curtailment gain                                                                (4)               -                   -
                                                                             -----            -----               -----

NET PERIODIC POSTRETIREMENT COST
                                                                             $  12            $  15               $  23
                                                                             =====            =====               =====
</TABLE>




Weighted-average actuarial assumptions are set forth in the following table.

WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS

<TABLE>
<CAPTION>
December 31                                                            2001             2000          1999
                                                                   --------------   -------------  --------------
<S>                                                                <C>              <C>            <C>
PENSION BENEFITS
Discount rate                                                           7.25%          7.50%         7.75%
Expected return on plan assets                                          8.00%          7.75%         8.00%
Rate of compensation increases                                          5.83%          5.83%         5.70%

POSTRETIREMENT BENEFITS
Discount rate                                                           7.25%          7.50%         7.75%
</TABLE>

The Company has limited its share of the health care trend rate to a
cost-of-living adjustment estimated to be 4% per year; therefore, the assumed
healthcare cost trend rate used in measuring the accumulated postretirement
benefit obligation was 4% per year in 2001. The healthcare cost trend rate
assumption has a significant effect on the amount of the benefit obligation and
periodic cost reported. An increase in the assumed healthcare cost trend rate of
1% in each year would increase the accumulated postretirement benefit obligation
as of December 31, 2001 by $14 million and the aggregate net periodic
postretirement benefit cost for 2001 by $1 million. A decrease in the assumed
healthcare cost trend rate of 1% in each year would decrease the accumulated
postretirement benefit obligation as of December 31, 2001 by $13 million and the
aggregate net periodic postretirement benefit cost for 2001 by $1 million.


SAVINGS PLANS

CNA sponsors savings plans, which are generally contributory plans that allow
most employees to contribute a maximum of 13% of their eligible compensation,
subject to certain limitations prescribed by the Internal Revenue Service. The
Company contributes matching amounts to participants, amounting to 70% of the
first 6% (35% of the first 6% in the first year of



                                      100
<PAGE>

employment) of eligible compensation contributed by the employee. Employees vest
in these contributions ratably over five years. Employees of RSKCoSM
participating in the CNA sponsored plan are able to contribute a maximum of 16%
of their eligible compensation, subject to certain limitations prescribed by the
Internal Revenue Service. RSKCoSM contributes matching amounts to participants,
amounting to 50% of the first 6% of eligible compensation contributed by the
employee.

As noted above, during 2000, CCC employees were required to make a choice
regarding their continued participation in CCC's defined benefit pension plan.
Employees who elected to forego earning additional benefits in the defined
benefit pension plan and all employees hired by CCC on or after January 1, 2000
receive a Company contribution of 3% or 5% of their eligible compensation,
depending on their age. In addition, these employees are eligible to receive
additional discretionary contributions of up to 2% of eligible compensation and
an additional Company match of up to 80% of the first 6% of eligible
compensation contributed by the employee. These contributions are made at the
discretion of management and are contributed to participant accounts in the
first quarter of the year following management's determination of the
discretionary amounts. Employees fully vest in these contributions after five
years of service.

Benefit expense for the Company's savings plans was $53 million, $51 million and
$29 million in 2001, 2000 and 1999.


STOCK OPTIONS

The Board of Directors approved the CNA Long-Term Incentive Plan (the LTI Plan)
during 1999 and subsequently merged it with the CNA Financial Corporation
Incentive Compensation Plan in February 2000. The LTI Plan authorizes the grant
of options to certain management personnel for up to 2.0 million shares of the
Company's common stock. All options granted have 10-year terms and vest ratably
over the four-year period following the date of grant. The number of shares
available for the granting of options under the LTI Plan as of December 31,
2001, was approximately 0.9 million.

The following table presents activity under the LTI Plan during 2001, 2000 and
1999.

OPTION PLAN ACTIVITY
<TABLE>
<CAPTION>
                                              2001                      2000                      1999
                                    ------------------------- ------------------------  --------------------------
                                                  Weighted-                 Weighted-                 Weighted-
                                                   Average                   Average                   Average
                                                   Option                     Option                    Option
                                      Number      Price Per     Number      Price per      Number     Price per
                                     Of Shares     Shares      Of Shares      Share      Of Shares      Share
                                    ------------ ------------ ------------ -----------  -----------  -------------
<S>                                 <C>          <C>          <C>          <C>          <C>          <C>
Balance at January 1                   553,275    $   33.56     291,300         35.21   $       -       $       -
Options granted                        514,000        33.36     318,300         32.15     294,900           35.21
Options exercised                       (8,625)       35.09      (3,300)        35.09           -            -
Options forfeited                     (166,550)       33.59     (53,025)        34.02      (3,600)          35.09
                                     ---------    ---------   ---------     ---------   ---------       ---------

BALANCE AT DECEMBER 31                 892,100    $   33.43     553,275     $   33.56     291,300       $   35.21
                                     =========    =========   =========     =========   =========       =========

OPTIONS EXERCISABLE AT DECEMBER 31     144,102    $   34.13      63,575     $   35.23           -       $       -
                                     =========    =========   =========     =========   =========       =========

WEIGHTED-AVERAGE FAIR VALUE PER
  SHARE OF OPTIONS GRANTED                        $    7.76                 $   12.10                   $   11.82
                                                  =========                 =========                   =========
</TABLE>





                                      101
<PAGE>



The weighted-average remaining contractual life of options outstanding was nine
years, and the range of exercise prices on those options was $32.03 to $36.53.


The fair value of granted options was estimated at the grant date using the
Black-Scholes option-pricing model. The weighted-average fair value of options
granted during each of the three years ended December 31, 2001, 2000 and 1999
was $4 million. The following weighted-average assumptions were used for the
years ended December 31, 2001, 2000 and 1999: risk free interest rate of 4.5%,
6.2%, and 6.2%; expected dividend yield of 0%; and expected option life of 5
years. The weighted-average assumption for the expected stock price volatility
was 26.4%, 29.2% and 22.9% for the years ended December 31, 2001, 2000 and 1999.


CNA Surety has reserved shares of its common stock for issuance to directors,
officers and employees of CNA Surety through incentive stock options,
non-qualified stock options and stock appreciation rights under separate plans
(CNA Surety Plans). The CNA Surety Plans have an aggregate number of 1.0 million
shares available for which options may be granted. At December 31, 2001,
approximately 1.7 million options were outstanding under these plans.


The Company follows the financial disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), with respect to its stock-based incentive plans. The Company applies
Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations, in accounting for its plan, as
permitted by SFAS 123. Accordingly, no compensation cost has been recognized for
any of the aforementioned plans, as the exercise price of the granted options
equaled the market price of the underlying stock at the grant date. However, had
the Company applied the fair value provision of SFAS 123, the Company's net
loss, including the pro forma effect of the options issued under the CNA Surety
Plan and the LTI Plan, for the year ended December 31, 2001 would have been
$1,645 million, or a net loss per share of $8.49 compared with the reported net
loss of $1,644 million, or a net loss per share of $8.48. For the year ended
December 31, 2000, the net income would have been $1,213 million, or a net
income per share of $6.60 compared with the reported net income of $1,214
million, or a net income per share of $6.61. For the year ended December 31,
1999, the net loss would have been $131 million, or a net loss per share of
$0.78.


NOTE K. OPERATING LEASES AND OTHER COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

CNA occupies office facilities under lease agreements that expire at various
dates through 2014. CNA's home office is partially situated on grounds under
leases expiring in 2058. In addition, data processing, office and transportation
equipment is leased under agreements that expire at various dates through 2006.
Most leases contain renewal options that provide for rent increases based on
prevailing market conditions. Lease expense for the years ended December 31,
2001, 2000 and 1999 was $89 million, $83 million and $81 million. Lease and
sublease revenues for the years ended December 31, 2001, 2000 and 1999 were $21
million, $45 million and $33 million.





                                      102
<PAGE>




The table below presents the future minimum lease payments to be made under
non-cancelable operating leases along with lease and sublease future minimum
receipts to be received on owned and leased properties at December 31, 2001.

FUTURE MINIMUM LEASE PAYMENTS AND RECEIPTS
<TABLE>
<CAPTION>
                                                              FUTURE         FUTURE
                                                              MINIMUM       MINIMUM
                                                               LEASE         LEASE
                                                             PAYMENTS       RECEIPTS
                                                           ------------   ------------
(In millions)
<S>                                                        <C>            <C>
2002                                                          $112            $ 21
2003                                                            99              18
2004                                                            80              15
2005                                                            69              10
2006                                                            52               9
Thereafter                                                     184              41
                                                              ----            ----

TOTAL                                                         $596            $114
                                                              ====            ====
</TABLE>




OTHER COMMITMENTS AND CONTINGENCIES

In the normal course of business, CNA has obtained letters of credit in favor of
various unaffiliated insurance companies, regulatory authorities and other
entities. At December 31, 2001, there were approximately $270 million of
outstanding letters of credit.


The Company has committed approximately $152 million to future capital calls
from various third-party limited partnership investments in exchange for an
ownership interest in the related partnerships.


The Company has a commitment to purchase a $100 million floating rate note
issued by the California Earthquake Authority in the event California
earthquake-related insurance losses exceed $4.9 billion prior to December 31,
2002.


The Company has entered into a limited number of guaranteed payment contracts,
primarily relating to telecommunication services, amounting to approximately $41
million. Estimated future minimum purchases under these contracts are as
follows: $14 million in 2002; $14 million in 2003; $10 million in 2004; and $3
million in 2005.


NOTE L. STOCKHOLDERS' EQUITY AND STATUTORY FINANCIAL INFORMATION

Capital stock (in whole numbers) is composed of the following:

SUMMARY OF CAPITAL STOCK
<TABLE>
<CAPTION>
December 31                                                                                2001             2000
                                                                                       -------------    --------------
<S>                                                                                    <C>              <C>
PREFERRED STOCK, WITHOUT PAR VALUE, NON-VOTING
Authorized                                                                                12,500,000      12,500,000


COMMON STOCK, PAR VALUE $2.50
Authorized                                                                               500,000,000     500,000,000
Issued                                                                                   225,850,270     185,525,907
Outstanding                                                                              223,596,861     183,263,873
Treasury stock                                                                             2,253,409       2,262,034
</TABLE>




                                      103
<PAGE>

During 2001, CNA issued and sold 40,324,363 shares of common stock for $25 per
share through a rights offering to stockholders of record on August 23, 2001.
The net proceeds from the rights offering amounted to $1,006 million. In
connection with the rights offering, Loews purchased 38,281,644 shares;
additionally, Loews purchased 836,500 shares on the open market during 2001,
increasing its ownership percentage to 88.8% at December 31, 2001.

During 2000, the Company redeemed for $150 million all outstanding shares of its
money market preferred stock at its stated value of $100,000 per share plus
accrued dividends.

In 1999, the Company increased the number of authorized shares of common stock
from 200,000,000 to 500,000,000.

CNA's Board of Directors has approved the Share Repurchase Program to purchase,
in the open market or through privately negotiated transactions, its outstanding
common stock, as Company management deems appropriate. During 2000, CNA
purchased 1,272,700 shares of its common stock for approximately $35 million. No
shares of common stock were purchased during 2001 or 1999.

During 2000 and 1999, CNA sold 126,342 shares and 507,362 shares of common stock
that were held in treasury to certain senior officers of CNA, at the average of
the highest and lowest sale prices on the New York Stock Exchange composite
transactions, for the dates of the sales. Each of these purchases by senior
officers was financed by collateralized loans from CNA that, at origination,
amounted to $4 million and $19 million for the years ended December 31, 2000 and
1999. The loans are 10-year notes, which bear interest at the applicable federal
rate for the month in which they originated, compounding semiannually and due at
maturity. The interest rates range from 5.23% to 6.14% at December 31, 2001. No
shares of common stock were sold to senior officers of CNA during 2001.

STATUTORY ACCOUNTING PRACTICES (UNAUDITED)

CNA's insurance subsidiaries are domiciled in various jurisdictions. These
subsidiaries prepare statutory financial statements in accordance with
accounting practices prescribed or permitted by the respective jurisdictions'
insurance regulators. Prescribed statutory accounting practices are set forth in
a variety of publications of the National Association of Insurance Commissioners
(NAIC) as well as state laws, regulations and general administrative rules. The
Company's insurance subsidiaries follow two significant permitted accounting
practices related to discounting of certain non-tabular workers compensation
claims and the phase in from valuing at par to a market valuation method for
recording an affiliated promissory note between CCC (lender) and Viaticus, Inc.
(borrower), a wholly owned subsidiary of CNAF.

The impact of the permitted practice related to discounting of certain
non-tabular workers compensation claims was to increase statutory surplus by
approximately $47 million, $71 million and $95 million at December 31, 2001,
2000 and 1999. This practice was followed by an acquired company, and CNA
received permission to eliminate the effect of the permitted practice over a
10-year period, which ends in 2003.

CCC has filed for approval with the Illinois Department of Insurance (the
Department) the affiliated promissory note between CCC and Viaticus, Inc. Review
of this note is still ongoing by the Department and formal approval has yet to
be received. Therefore, the Department has granted a permitted practice that
expires on June 30, 2002 to carry this note at a value of approximately $449
million as of December 31, 2001. The par value of this note at December


                                      104
<PAGE>

31, 2001 was approximately $464 million. The Company does not believe that the
outcome of the Department's review will have a material impact on CCC's results
of operations or financial position.

CNAF's ability to pay dividends and other credit obligations is significantly
dependent on receipt of dividends from its subsidiaries. The payment of
dividends to CNAF by its insurance subsidiaries without prior approval of the
insurance department of each subsidiary's domiciliary jurisdiction is limited by
formula. Dividends in excess of these amounts are subject to prior approval by
the respective state insurance departments.

Dividends from the CCC Pool are subject to the insurance holding company laws of
the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary
dividends, or dividends that do not require prior approval of the Department,
may be paid only from earned surplus, which is calculated by removing unrealized
gains (which under statutory accounting includes cumulative earnings of CCC's
subsidiaries) from unassigned surplus. As of December 31, 2001, CCC is in a
negative earned surplus position. In February 2002, the Department approved an
extraordinary dividend in the amount of $117 million to be used to fund CNAF's
2002 debt service requirements. Until CCC is in a positive earned surplus
position, all dividends require prior approval of the Department.

In addition, by agreement with the New Hampshire Insurance Department, as well
as certain other state insurance departments, dividend payments for the CIC pool
are restricted to internal and external debt service requirements through
September 2003 up to a maximum of $85 million annually, without the prior
approval of the New Hampshire Insurance Department.

CNA's domestic insurance subsidiaries are subject to risk-based capital
requirements. Risk-based capital is a method developed by the NAIC to determine
the minimum amount of statutory capital appropriate for an insurance company to
support its overall business operations in consideration of its size and risk
profile. The formula for determining the amount of risk-based capital specifies
various factors, weighted based on the perceived degree of risk, that are
applied to certain financial balances and financial activity. The adequacy of a
company's actual capital is evaluated by a comparison to the risk-based capital
results, as determined by the formula. Companies below minimum risk-based
capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 2001 and 2000, all of
CNA's domestic insurance subsidiaries exceeded the minimum risk-based capital
requirements.



                                      105
<PAGE>

Combined statutory capital and surplus and net (loss) income, determined in
accordance with accounting practices prescribed or permitted by the regulations
and statutes of various insurance regulators for the property-casualty and the
life insurance subsidiaries, were as follows.

STATUTORY INFORMATION

<TABLE>
<CAPTION>
                                     STATUTORY CAPITAL AND SURPLUS             STATUTORY NET (LOSS) INCOME
                                    -------------------------------- -----------------------------------------------
                                              December 31                        Years Ended December 31
                                    -------------------------------- -----------------------------------------------
                                         2001           2000             2001             2000              1999
                                    -------------   ------------     ------------     -------------    -------------
(In millions)
<S>                                 <C>             <C>              <C>              <C>              <C>
Property-casualty companies*         $    6,225      $    8,373       $   (1,650)       $    1,067       $     361
Life insurance companies                  1,752           1,274               56               (47)             77
</TABLE>

* Surplus includes the property-casualty companies' equity ownership of the life
insurance subsidiaries.

NOTE M.  COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income is composed of all changes to stockholders' equity,
except those changes resulting from transactions with stockholders in their
capacity as stockholders. The components of comprehensive (loss) income are
shown below.

COMPREHENSIVE (LOSS) INCOME

<TABLE>
<CAPTION>
Years ended December 31                                                     2001            2000           1999
                                                                        -------------- -------------- --------------
(In millions)
<S>                                                                     <C>            <C>            <C>
Net (loss) income                                                         $    (1,644)   $     1,214     $     (130)
                                                                        -------------- -------------- --------------

Other comprehensive (loss) income:
  Change in unrealized gains/losses on general account
    investments:
    Holding (losses) gains arising during the period                              (14)           422            714
    Less: unrealized gains at beginning of period
      included in realized gains during the period                             (1,039)          (924)          (413)
                                                                        -------------- -------------- --------------

    Net change in unrealized gains/losses on general
      account investments                                                      (1,053)          (502)           301
    Net change in unrealized gains/losses on separate
      accounts and other                                                            7             66            (59)
    Foreign currency translation adjustment                                         6            (28)           (42)
    Minimum pension liability adjustment                                          (24)             -              -
    Allocation to participating policyholders' and minority interests              (4)           (12)            24
                                                                        -------------- -------------- --------------

Other comprehensive (loss) income, before tax and
  cumulative effect of a change in accounting principle                        (1,068)          (476)           224
Deferred income tax benefit (expense) related to other
  comprehensive (loss) income                                                     363            161           (100)
                                                                        -------------- -------------- --------------


Other comprehensive (loss) income, before cumulative
  effect of a change in accounting principle                                     (705)          (315)           124
Cumulative effect of a change in accounting principle,
  net of tax of $31                                                                58              -              -
                                                                        -------------- -------------- --------------

Other comprehensive (loss) income, net of tax and
  cumulative effect of a change in accounting principle                          (647)          (315)           124
                                                                        -------------- -------------- --------------

TOTAL COMPREHENSIVE (LOSS) INCOME                                         $    (2,291)   $       899     $       (6)
                                                                        ============== ============== ==============
</TABLE>


In the preceding table, deferred income tax benefit and expense related to other
comprehensive income is attributable to each of the components of other
comprehensive income in equal



                                      106
<PAGE>

proportion except for the foreign currency translation adjustment, for which
there are no deferred taxes.

The following table displays the components of accumulated other comprehensive
income included in the Consolidated Balance Sheets.

ACCUMULATED OTHER COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
December 31                                                                                2001            2000
                                                                                       -------------- --------------
(In millions)
<S>                                                                                    <C>            <C>
Cumulative foreign currency translation adjustment                                     $           9  $           3
Minimum pension liability adjustment                                                             (24)             -
Cumulative effect of a change in accounting principle, net of tax of $31                          58              -
Net unrealized gains on investments                                                              183            870
                                                                                       -------------- --------------

ACCUMULATED OTHER COMPREHENSIVE INCOME                                                 $         226  $         873
                                                                                       ============== ==============
</TABLE>

NOTE N. BUSINESS SEGMENTS

As discussed in more detail in Note O, CNA underwent significant management
changes, strategic realignment and restructuring in the second half of 2001.
These management changes as well as the strategic realignment and restructuring
has changed the way CNA manages its operations and makes business decisions; and
therefore, necessitated a change in the Company's reportable segments.

The changes made to the Company's reportable segments were as follows: 1)
Commercial Insurance and CNA Excess & Select (formerly included in Agency Market
Operations) and Risk Management Operations were combined into Standard Lines; 2)
CNA Pro, CNA HealthPro and CNA Guaranty and Credit (formerly included in
Specialty Operations) and Global Operations were combined into Specialty Lines;
3) losses and expenses related to the centralized adjusting and settlement of
APMT claims previously included in Commercial Insurance, CNA Excess & Select,
Risk Management and Global Operations are now included in the Corporate and
Other segment; and 4) Personal Insurance, CNA UniSource, agriculture insurance,
entertainment insurance and other financial lines were moved from the various
property-casualty segments to the Corporate and Other segment. CNA Re, Group
Operations and Life Operations are unchanged from the prior segment
presentation.

Segment disclosures of prior periods have been modified to conform to the
current year presentation.

CNA now conducts its operations through five operating segments: Standard Lines,
Specialty Lines, CNA Re, Group Operations and Life Operations. These segments
are managed separately because of differences in their product lines. In
addition to these five operating segments, certain other activities are reported
in the Corporate and Other segment. These segments reflect the way CNA manages
its operations and makes business decisions.

Standard Lines builds on the Company's long and successful relationship with the
independent agency system and network of brokers to market a broad range of
property-casualty insurance products and services to small, mid-size and large
businesses. In addition, Standard Lines provides total risk management services
relating to claims services, loss control, cost management and information
services to the commercial insurance marketplace.

Specialty Lines provides a broad array of professional, financial and specialty
domestic and international property-casualty products and services through a
network of brokers, managing


                                      107
<PAGE>

general agencies and independent agencies. Specialty Lines provides creative
solutions for managing the risks of its clients, including architects,
engineers, lawyers, healthcare professionals, financial intermediaries and
corporate directors and officers. Product offerings also include surety and
fidelity bonds, ocean marine insurance and vehicle and equipment warranty
services.

CNA Re operates globally as a reinsurer in the broker market for treaty products
and in the direct market for facultative products. CNA Re markets products in
the following treaty business segments: standard lines, surplus lines, global
catastrophe, specialty lines and financial reinsurance. In addition, CNA Re
markets property and casualty facultative products directly to clients.

Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups, and other entities that
purchase insurance as a group. Group Operations also provides life and health
insurance to federal employees.

Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long-term care
insurance and annuities and other products. Life Operations also provides
retirement service products to institutions in the form of various investment
products and administrative services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers, and other independent insurance consultants.

The Corporate and Other segment is principally comprised of Personal Insurance,
losses and expenses related to the centralized adjusting and settlement of APMT
claims, certain run-off insurance operations and other operations. Additionally,
the Corporate and Other segment's results include interest expense on corporate
borrowings, asbestos claims related to Fibreboard Corporation, eBusiness
initiatives and CNA UniSource.

The accounting policies of the segments are the same as those described in the
summary of significant accounting polices. The Company manages most of its
assets on a legal entity basis, while segment operations are conducted across
legal entities. As such, only receivables and reserves are readily identifiable
by individual segment. Distinct investment portfolios are not maintained for
each segment; accordingly, allocation of assets to each segment is not
performed. Therefore, net investment income and realized investment gains/losses
are allocated primarily based on each segment's net carried insurance reserves,
as adjusted.

All significant intrasegment income and expense has been eliminated. Standard
Lines' other revenues and expenses include revenues for services provided by
RSKCo(SM) to other units within the Standard Lines segment that are eliminated
at the consolidated level. Intrasegment revenue and expenses eliminated at the
consolidated level were approximately $154 million, $159 million and $176
million for the years ended December 31, 2001, 2000 and 1999.

Income taxes have been allocated on the basis of the taxable income of the
segments.

Approximately 4.8%, 8.2% and 7.6% of CNA's gross written premiums were derived
from outside the United States, primarily the United Kingdom, for the years
ended December 31, 2001, 2000 and 1999. Gross written premiums from the United
Kingdom were approximately 3.3%, 5.3% and 5.8% of CNA's premiums for the years
ended December 31, 2001, 2000 and



                                      108
<PAGE>

1999. Gross written premiums from any individual foreign country, other than the
United Kingdom, were not significant.

Group Operations' revenues include $2.2 billion, $2.1 billion and $2.1 billion
in 2001, 2000 and 1999 under contracts covering U.S. government employees and
their dependents.













                                      109
<PAGE>
<TABLE>
<CAPTION>
                                                             STANDARD   SPECIALTY                GROUP       LIFE       CORPORATE
Year ended December 31, 2001                                  LINES       LINES      CNA RE    OPERATIONS  OPERATIONS   AND OTHER
                                                            ---------- ----------- ----------- ----------- ----------- -----------
(In millions)
<S>                                                         <C>        <C>         <C>         <C>         <C>         <C>

Net earned premiums                                          $  2,454    $  1,915    $    641    $  3,458    $    954    $      5
Claims, benefits and expenses                                   3,675       2,654       1,752       3,627       1,491       1,268
Restructuring and other related
charges                                                            36           9           6           1          70         119
                                                             --------    --------    --------    --------    --------    --------

  Underwriting loss                                            (1,257)       (748)     (1,117)       (170)       (607)     (1,382)

Net investment income                                             484         318         175         170         618         132
Other revenues                                                    340         123           5          20         200         156
Other expenses                                                    306         148           3           8         112         443
Non-insurance restructuring and other related charges              10          --          --          --          --          --
                                                             --------    --------    --------    --------    --------    --------

  Pretax operating (loss) income                                 (749)       (455)       (940)         12          99      (1,537)

Income tax benefit (expense)                                      297         148         274           1         (33)        503
Minority interest                                                  --         (21)         --          --          --          --
                                                             --------    --------    --------    --------    --------    --------

Net operating (loss) income, excluding realized investment
  gains                                                          (452)       (328)       (666)         13          66      (1,034)
Realized investment gains (losses), net of tax,
  participating policyholders' and minority interests             452         169         (41)         27         123          88
Cumulative effect of a change in accounting principle, net
  of tax                                                          (30)        (14)         (5)         (1)         (3)         (8)
                                                             --------    --------    --------    --------    --------    --------

NET (LOSS) INCOME                                            $    (30)   $   (173)   $   (712)   $     39    $    186    $   (954)
                                                             ========    ========    ========    ========    ========    ========

RECEIVABLES, NET                                             $  7,086    $  3,089    $  2,293    $  1,148    $    926    $  2,936
                                                             ========    ========    ========    ========    ========    ========

INSURANCE RESERVES                                           $ 14,639    $  7,217    $  5,180    $  2,744    $  8,402    $  5,441
                                                             ========    ========    ========    ========    ========    ========
<CAPTION>
Year ended December 31, 2001                                 ELIMINATIONS   TOTAL
                                                             ------------ ----------
(In millions)
<S>                                                          <C>          <C>

Net earned premiums                                            $    (62)   $  9,365
Claims, benefits and expenses                                       (62)     14,405
Restructuring and other related
charges                                                              --         241
                                                               --------    --------

  Underwriting loss                                                  --      (5,281)

Net investment income                                                --       1,897
Other revenues                                                     (168)        676
Other expenses                                                     (168)        852
Non-insurance restructuring and other related charges                --          10
                                                               --------    --------

  Pretax operating (loss) income                                     --      (3,570)

Income tax benefit (expense)                                         --       1,190
Minority interest                                                    --         (21)
                                                               --------    --------

Net operating (loss) income, excluding realized investment
  gains                                                              --      (2,401)
Realized investment gains (losses), net of tax,
  participating policyholders' and minority interests                --         818
Cumulative effect of a change in accounting principle, net
  of tax                                                             --         (61)
                                                               --------    --------

NET (LOSS) INCOME                                              $     --    $ (1,644)
                                                               ========    ========

RECEIVABLES, NET                                               $     --    $ 17,478
                                                               ========    ========

INSURANCE RESERVES                                             $     --    $ 43,623
                                                               ========    ========
</TABLE>
                                      110
<PAGE>
<TABLE>
<CAPTION>
                                                             STANDARD   SPECIALTY                 GROUP       LIFE      CORPORATE
Year ended December 31, 2000                                  LINES       LINES       CNA RE    OPERATIONS  OPERATIONS  AND OTHER
                                                            ----------  ----------  ----------  ----------  ----------  ----------
(In millions)
<S>                                                         <C>         <C>         <C>         <C>         <C>         <C>
Net earned premiums                                          $  3,970    $  1,868    $  1,089    $  3,675    $    876    $     42
Claims, benefits and expenses                                   4,480       1,933       1,186       3,770       1,316          71
                                                             --------    --------    --------    --------    --------    --------

  Underwriting loss                                              (510)        (65)        (97)        (95)       (440)        (29)

Net investment income                                             736         383         212         163         620         172
Other revenues                                                    344         139           5          49         192         183
Other expenses                                                    309         143           4          46          99         579
                                                             --------    --------    --------    --------    --------    --------

  Pretax operating income (loss)                                  261         314         116          71         273        (253)

Income tax (expense) benefit                                      (59)        (91)        (42)        (21)        (92)         95
Minority interest                                                  --         (24)         --          --          --          (4)
                                                             --------    --------    --------    --------    --------    --------

Net operating income (loss), excluding realized investment
  gains                                                           202         199          74          50         181        (162)
Realized investment gains, net of tax, participating
  policyholders' and minority interests                           325         172          63          41          10          59
                                                             --------    --------    --------    --------    --------    --------

NET INCOME (LOSS)                                            $    527    $    371    $    137    $     91    $    191    $   (103)
                                                             ========    ========    ========    ========    ========    ========

RECEIVABLES, NET                                             $  5,696    $  1,990    $  2,359    $  1,261    $    651    $  2,145
                                                             ========    ========    ========    ========    ========    ========

INSURANCE RESERVES                                           $ 15,256    $  6,319    $  4,609    $  2,644    $  7,715    $  2,511
                                                             ========    ========    ========    ========    ========    ========
<CAPTION>

Year ended December 31, 2000                                 ELIMINATIONS   TOTAL
                                                             ------------ ----------
(In millions)
<S>                                                           <C>         <C>
Net earned premiums                                            $    (46)   $ 11,474
Claims, benefits and expenses                                       (46)     12,710
                                                               --------    --------

  Underwriting loss                                                  --      (1,236)

Net investment income                                                --       2,286
Other revenues                                                     (173)        739
Other expenses                                                     (173)      1,007
                                                               --------    --------

  Pretax operating income (loss)                                     --         782

Income tax (expense) benefit                                         --        (210)
Minority interest                                                    --         (28)
                                                               --------    --------

Net operating income (loss), excluding realized investment
  gains                                                              --         544
Realized investment gains, net of tax, participating
  policyholders' and minority interests                              --         670
                                                               --------    --------

NET INCOME (LOSS)                                              $     --    $  1,214
                                                               ========    ========

RECEIVABLES, NET                                               $     --    $ 14,102
                                                               ========    ========

INSURANCE RESERVES                                             $     --    $ 39,054
                                                               ========    ========
</TABLE>
                                      111
<PAGE>
<TABLE>
<CAPTION>
                                                             STANDARD    SPECIALTY                GROUP       LIFE      CORPORATE
Year ended December 31, 1999                                  LINES        LINES      CNA RE    OPERATIONS  OPERATIONS  AND OTHER
                                                            ----------  ----------  ----------  ----------  ----------  ----------
(In millions)
<S>                                                         <C>         <C>         <C>         <C>         <C>         <C>
Net earned premiums                                          $  4,241    $  1,942    $  1,176    $  3,571    $    936    $  1,463
Claims, benefits and expenses                                   4,919       2,159       1,369       3,706       1,322       1,890
Restructuring and other related
charges                                                            59          --          --           5          --           1
                                                             --------    --------    --------    --------    --------    --------

  Underwriting loss                                              (737)       (217)       (193)       (140)       (386)       (428)

Net investment income                                             709         372         170         137         561         245
Other revenues                                                    334         138          (1)         40         123         267
Other expenses                                                    291         127          (5)         46          77         651
Non-insurance restructuring and other related charges              10          --          --          --          --           8
                                                             --------    --------    --------    --------    --------    --------

  Pretax operating income (loss)                                    5         166         (19)         (9)        221        (575)

Income tax benefit (expense)                                       31         (37)         12           8         (73)        231
Minority interest                                                  --         (28)         --          --          --          (2)
                                                             --------    --------    --------    --------    --------    --------

Net operating income (loss), excluding realized investment
  gains                                                            36         101          (7)         (1)        148        (346)
Realized investment gains (losses), net of tax,
  participating policyholders' and minority interests              62          34          15          (1)        (34)         40
Cumulative effect of a change in accounting principle, net
  of tax                                                         (166)         (5)         --          (2)         (2)         (2)
                                                             --------    --------    --------    --------    --------    --------

NET (LOSS) INCOME                                            $    (68)   $    130    $      8    $     (4)   $    112    $   (308)
                                                             ========    ========    ========    ========    ========    ========

RECEIVABLES, NET                                             $  3,519    $  1,593    $    814    $    685    $    550    $  5,047
                                                             ========    ========    ========    ========    ========    ========

INSURANCE RESERVES                                           $ 16,093    $  6,641    $  4,418    $  2,469    $  7,166    $  2,484
                                                             ========    ========    ========    ========    ========    ========

<CAPTION>

Year ended December 31, 1999                                 ELIMINATIONS   TOTAL
                                                             ------------ ----------
(In millions)
<S>                                                           <C>         <C>
Net earned premiums                                            $    (47)   $ 13,282
Claims, benefits and expenses                                       (47)     15,318
Restructuring and other related
charges                                                              --          65
                                                               --------    --------

  Underwriting loss                                                  --      (2,101)

Net investment income                                                --       2,194
Other revenues                                                     (196)        705
Other expenses                                                     (196)        991
Non-insurance restructuring and other related charges                --          18
                                                               --------    --------

  Pretax operating income (loss)                                     --        (211)

Income tax benefit (expense)                                         --         172
Minority interest                                                    --         (30)
                                                               --------    --------

Net operating income (loss), excluding realized investment
  gains                                                              --         (69)
Realized investment gains (losses), net of tax,
  participating policyholders' and minority interests                --         116
Cumulative effect of a change in accounting principle, net
  of tax                                                             --        (177)
                                                               --------    --------

NET (LOSS) INCOME                                              $     --    $   (130)
                                                               ========    ========

RECEIVABLES, NET                                               $     --    $ 12,208
                                                               ========    ========

INSURANCE RESERVES                                             $     --    $ 39,271
                                                               ========    ========
</TABLE>
                                      112
<PAGE>

NOTE O.  RESTRUCTURING AND OTHER RELATED CHARGES

In 2001, the Company finalized and approved two separate restructuring plans.
The first plan, which related to the Company's Information Technology operations
(the IT Plan), was approved in June of 2001. The second plan, which principally
relates to restructuring the property-casualty segments and Life Operations,
discontinuation of variable life and annuity business and consolidation of real
estate locations (the 2001 Plan), was approved in December 2001.

IT PLAN

The overall goal of the IT Plan was to improve technology for the underwriting
function and throughout the Company and to eliminate inefficiencies in the
deployment of IT resources. The changes facilitate a strong focus on
enterprise-wide system initiatives. The IT Plan had two main components, which
include the reorganization of IT resources into the Technology and Operations
Group with a structure based on centralized, functional roles and the
implementation of an integrated technology roadmap that includes common
architecture and platform standards that directly support the Company's
strategies.

As summarized in the following table, the Company incurred $62 million, pretax,
of restructuring and other related charges for the IT Plan. The Company does not
expect to incur significant amounts of additional charges with respect to the IT
Plan in any future period and, as a result, does not intend to separately
classify such expenses as restructuring and other related charges when they
occur.

IT PLAN PRETAX CHARGES BY SEGMENT

<TABLE>
<CAPTION>
                                                                          EMPLOYEE
                                                          TERMINATION     IMPAIRED
                                                          AND RELATED       ASSET          OTHER
                                                         BENEFIT COSTS     CHARGES         COSTS          TOTAL
                                                         -------------- -------------- -------------- ---------------
(In millions)
<S>                                                      <C>            <C>            <C>            <C>
Standard Lines                                            $         5    $         1    $         -    $          6
Specialty Lines                                                     2              -              -               2
Life Operations                                                     -             17              -              17
Corporate and Other                                                22             14              1              37
                                                         -------------- -------------- -------------- ---------------

TOTAL                                                     $        29    $        32    $         1    $         62
                                                         ============== ============== ============== ===============
</TABLE>


In connection with the IT Plan, after the write-off of impaired assets, the
Company accrued $30 million of restructuring and other related charges in 2001
(the IT Plan Initial Accrual). These charges primarily related to $29 million of
workforce reductions of approximately 260 positions gross and 249 positions net
and $1 million of other costs.



                                      113
<PAGE>

The following table summarizes the IT Plan Initial Accrual and the activity in
that accrual during 2001.

IT PLAN PRETAX INITIAL ACCRUAL

<TABLE>
<CAPTION>
                                                           EMPLOYEE
                                                          TERMINATION     IMPAIRED
                                                          AND RELATED       ASSET          OTHER
                                                         BENEFIT COSTS     CHARGES         COSTS          TOTAL
                                                         -------------- -------------- -------------- ---------------
(In millions)
<S>                                                      <C>            <C>            <C>            <C>
IT Plan initial accrual                                  $          29   $        32    $         1    $          62
Costs that did not require cash                                      -           (32)             -              (32)
Payments charged against liability                                 (19)            -              -              (19)
                                                         -------------- -------------- -------------- ---------------

ACCRUED COSTS AT DECEMBER 31, 2001                       $          10   $         -    $         1    $          11
                                                         ============== ============== ============== ===============
</TABLE>



Through December 31, 2001, 249 employees were released due to the IT Plan,
nearly all of whom were technology support staff.

2001 PLAN

The overall goal of the 2001 Plan is to create a simplified and leaner
organization for customers and business partners. The major components of the
plan include a reduction in the number of strategic business units (SBUs) in the
property-casualty operations, changes in the strategic focus of the Life
Operations and consolidation of real estate locations. The reduction in the
number of property-casualty SBUs resulted in consolidation of SBU functions,
including underwriting, claims, marketing and finance. The strategic changes in
Life Operations include a decision to discontinue the variable life and annuity
business.

As summarized in the following table, the Company incurred $189 million pretax,
of restructuring and other related charges for the 2001 Plan. The Company does
not expect to incur significant amounts of additional charges with respect to
the 2001 Plan in any future period and, as a result, does not intend to
separately classify such expenses as restructuring and other related charges
when they occur.

2001 PLAN PRETAX CHARGES BY SEGMENT

<TABLE>
<CAPTION>
                                       EMPLOYEE
                                      TERMINATION        LEASE          IMPAIRED
                                      AND RELATED     TERMINATION         ASSET            OTHER
                                     BENEFIT COSTS       COSTS           CHARGES           COSTS            TOTAL
                                    --------------- ---------------- ---------------- --------------- ----------------
(In millions)
<S>                                 <C>             <C>              <C>              <C>             <C>
Standard Lines                       $         40    $           -    $           -    $          -    $          40
Specialty Lines                                 7                -                -               -                7
CNA Re                                          2                4                -               -                6
Group Operations                                1                -                -               -                1
Life Operations                                 9                -                9              35               53
Corporate and Other                             9               52               21               -               82
                                    --------------- ---------------- ---------------- --------------- ----------------

TOTAL                               $          68   $           56    $          30    $         35    $         189
                                    =============== ================ ================ =============== ================
</TABLE>



All lease termination costs and impaired asset charges, except lease termination
costs incurred by operations in the United Kingdom and software write-offs
incurred by Life Operations, were charged to the Corporate and Other segment
because office closure and consolidation decisions were not within the control
of the other segments affected. Lease termination costs incurred in the United
Kingdom relate solely to the operations of CNA Re. All other charges


                                      114
<PAGE>

were recorded in the segment benefiting from the services or existence of an
employee or an asset.

The 2001 Plan charges incurred by Standard Lines were $40 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 1,063 positions, gross and net, of which $27
million related to severance and outplacement costs and $13 million related to
other salary costs. Through December 31, 2001, approximately 510 employees were
released due to the 2001 Plan. Approximately 272 of these employees were
administrative, technology or financial support staff; approximately 164 of
these employees were underwriters, claim adjusters and related insurance
services staff; and approximately 74 of these employees were in various other
positions.

The 2001 Plan charges incurred by Specialty Lines were $7 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 177 positions, gross and net, of which $5 million
related to severance and outplacement costs and $2 million related to other
salary costs. Through December 31, 2001, approximately 107 employees were
released due to the 2001 Plan. Approximately 47 of these employees were
administrative, technology or financial support staff; approximately 45 of these
employees were underwriters, claim adjusters and related insurance services
staff; and approximately 15 of these employees were in various other positions.

The 2001 Plan charges incurred by CNA Re were $6 million. Costs related to
employee termination and related benefit costs for planned reductions in the
workforce of 33 positions, gross and net, amounted to $2 million, all of which
related to severance and outplacement costs. Through December 31, 2001, no
employees in CNA Re were released due to the 2001 Plan. The remaining $4 million
of charges incurred by CNA Re related to lease termination costs.

The 2001 Plan charges incurred by Group Operations were $1 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 38 positions, gross and net. Through December 31,
2001, no employees in Group Operations were released due to the 2001 Plan.

The 2001 Plan charges incurred by Life Operations were $53 million. Costs
related to employee termination and related benefit costs for planned reductions
in workforce of 356 positions, gross and net, amounted to $9 million, of which
$8 million related to severance and outplacement costs and $1 million related to
other salary costs. Through December 31, 2001, approximately seven employees
were released due to the 2001 Plan, which were primarily administrative,
technology, and financial support staff positions. Life Operations incurred $9
million of impaired asset charges related to software. Other costs of $35
million in Life Operations relate to a write-off of deferred acquisition costs
on inforce variable life and annuity contracts, as the company believes that the
decision to discontinue these products will negatively impact the persistency of
the business.

The 2001 Plan charges incurred by the Corporate and Other segment were $82
million. Costs related to employee termination and related benefit costs for
planned reductions in the workforce of 194 positions, gross and net, amounted to
$9 million, of which $6 million related to severance and outplacement costs and
$3 million related to other salary costs. Through December 31, 2001, 129
employees were released due to the 2001 Plan. Approximately 114 of these
employees were administrative, technology or financial support staff and
approximately 15 of these employees were in various other positions. The
Corporate and Other segment also


                                      115
<PAGE>

incurred $73 million of lease termination and asset impairment charges related
to office closure and consolidation decisions not within the control of the
other segments affected.

In connection with the 2001 Plan, the Company accrued $189 million of these
restructuring and other related charges (the 2001 Plan Initial Accrual). These
charges include employee termination and related benefit costs, lease
termination costs, impaired asset charges and other costs.

The following table summarizes the 2001 Plan Initial Accrual and the activity in
that accrual during 2001.

2001 PLAN INITIAL ACCRUAL

<TABLE>
<CAPTION>
                                       EMPLOYEE
                                      TERMINATION         LEASE          IMPAIRED
                                      AND RELATED      TERMINATION         ASSET            OTHER
                                     BENEFIT COSTS        COSTS           CHARGES           COSTS            TOTAL
                                    ---------------- ---------------- ---------------- ---------------- ----------------
(In millions)
<S>                                 <C>               <C>              <C>               <C>             <C>
2001 Plan initial accrual            $           68   $           56    $          30   $           35   $          189
Costs that did not require cash                   -                -                -              (35)             (35)
Payments charged against liability               (2)               -                -                -               (2)
                                    ---------------- ---------------- ---------------- ---------------- ----------------

ACCRUED COSTS DECEMBER 31, 2001      $           66   $           56   $           30   $            -   $          152
                                    ================ ================ ================ ================ ================
</TABLE>

Additionally, at December 31, 2000, an accrual of $7 million for lease
termination costs remained related to the August 1998 restructuring (1998 Plan).
Approximately $6 million of these costs were paid in 2001, resulting in a
remaining accrual of $1 million at December 31, 2001. No restructuring and other
related charges related to the 1998 Plan were incurred during 2001 or 2000.
Restructuring and other related charges for the 1998 Plan amounted to $83
million in 1999.

NOTE P.  SIGNIFICANT TRANSACTIONS

DISPOSITIONS AND PLANNED DISPOSITIONS OF CERTAIN SUBSIDIARIES

During the second quarter of 2001, the Company announced its intention to sell
certain subsidiaries. The assets being held for disposition include the U.K.
subsidiaries of CNA Re and certain other subsidiaries. Based upon impairment
analyses, the Company anticipated that it would realize losses in connection
with those planned sales. In determining the anticipated loss from these planned
dispositions, the Company estimated the net realizable value of each subsidiary
held for sale. An estimated after-tax loss of $320 million was initially
recorded in the second quarter of 2001 in connection with these planned
dispositions. This loss is reported in other realized investment losses.

The Company completed the sale of certain subsidiaries during the fourth quarter
of 2001 and updated its impairment analyses of subsidiaries still held for sale,
including the U.K. subsidiaries of CNA Re. The subsidiaries sold resulted in
after-tax realized losses of $38 million, all of which was previously recognized
as part of the initial impairment loss recorded during the second quarter of
2001. The updated impairment analyses indicated that the $320 million after-tax
realized loss recorded in the second quarter of 2001 should be reduced,
primarily because the net assets of the U.K. subsidiaries of CNA Re had been
significantly diminished by their operating losses in the second half of 2001.
In addition, the Company updated its estimate of disposal costs, including
anticipated capital contributions, to reflect



                                      116
<PAGE>

changes in planned structure of the anticipated sale. These updated impairment
analyses reduced the after-tax realized loss by $173 million, including $160
million related to the U.K. subsidiaries of CNA Re. The anticipated sale of the
U.K. insurance subsidiaries will be subject to regulatory approval and all
anticipated sales are expected to be completed in 2002.

CNA Re's principal United Kingdom operations are contained in CNA Reinsurance
Company Ltd. The statutory surplus of CNA Reinsurance Company Ltd. is below the
required regulatory minimum surplus level at December 31, 2001. The Company is
currently pursuing the sale of the United Kingdom subsidiaries of CNA Re, and
the Company anticipates that additional capital contributions will be made in
connection with the planned sale.

The subsidiaries held for sale (including those sold in the second half of
2001), consisting primarily of the U.K. subsidiaries of CNA Re, contributed
revenues of approximately $419 million and net operating losses of $386 million
for the year ended December 31, 2001. The assets and liabilities of these
subsidiaries were approximately $2.7 billion and $2.6 billion as of December 31,
2001.

INDIVIDUAL LIFE REINSURANCE TRANSACTION

Effective December 31, 2000, CNA completed a transaction with Munich American
Reassurance Company (MARC), whereby MARC acquired CNA's individual life
reinsurance business (CNA Life Re) via an indemnity reinsurance agreement. CNA
will continue to accept and retrocede business on existing CNA Life Re contracts
until such time that CNA and MARC are able to execute novations of each of CNA
Life Re's assumed and retroceded reinsurance contracts.

MARC assumed approximately $294 million of liabilities (primarily future policy
benefits and claim reserves) and approximately $209 million in assets (primarily
uncollected premiums and deferred acquisition costs). The net gain from the
reinsurance transaction, which is subject to certain post-closing adjustments,
has been recorded as deferred revenue and will be recognized in income over the
next six months as CNA Life Re's assumed contracts are novated to MARC.

The CNA Life Re business contributed net earned premiums of $229 million and
$194 million and net operating income of $22 million and $18 million for the
years ended December 31, 2000 and 1999.

PERSONAL INSURANCE TRANSACTION

On October 1, 1999, certain subsidiaries of CNA completed a transaction with The
Allstate Corporation (Allstate), whereby CNA's Personal Insurance lines of
business and related employees were transferred to Allstate. Approximately $1.1
billion of cash and $1.1 billion of additional assets (primarily premium
receivables and deferred acquisition costs) were transferred to Allstate, and
Allstate assumed $2.2 billion of claim and claim adjustment expense reserves and
unearned premium reserves. Additionally, CNA received $140 million in cash,
which consisted of 1) $120 million in ceding commission for the reinsurance of
the CNA personal insurance business by Allstate and 2) $20 million for an option
exercisable during 2002 to purchase 100% of the common stock of five CNA
insurance subsidiaries at a price equal to the GAAP carrying value as of the
exercise date. Also, CNA invested $75 million in a 10-year equity-linked note
issued by Allstate.


                                      117
<PAGE>

As of December 10, 2001, Allstate and CNA agreed to modify a number of the
original terms of the transaction. This modified agreement is pending regulatory
approval. The following is an overview of the significant modifications to the
terms of the original agreement:

1)   CNA has substituted subsidiaries for the originally named subsidiaries and
     extended the purchase option period for the substituted subsidiaries
     through 2004. The Company has compensated Allstate for the postponement of
     its right to exercise the option due to the substitution of companies in
     the amount of $6 million, reducing the original payment from Allstate of
     $20 million to approximately $14 million. The $14 million will continue to
     be deferred and will not be recognized until Allstate exercises its option,
     at which time it will be recorded as a realized gain.

2)   The $75 million 10-year equity-linked note issued by Allstate in October
     1999 will be redeemed by Allstate at par plus accrued interest.

CNA will continue to write new and renewal personal insurance policies and to
reinsure this business with Allstate companies until such time as Allstate
exercises its option to buy the CNA subsidiaries. CNA continues to have primary
liability on policies reinsured by Allstate. Through 2005, CNA will continue to
receive a royalty fee based on the volume of personal insurance business sold
through CNA agents using the terms of the original agreement.

CNA also shares in any reserve development related to claim and claim adjustment
expense reserves transferred to Allstate at the transaction date. Under the
reserve development sharing agreement, 80% of any favorable or unfavorable
reserve development up to $40 million and 90% of any favorable or unfavorable
reserve development in excess of $40 million inures to CNA. CNA's obligation
with respect to unallocated loss adjustment expense reserves was settled at the
transaction date and is therefore not subject to the reserve sharing
arrangement.

The retroactive portion of the reinsurance transaction, consisting primarily of
the cession of claim and claim adjustment expense reserves approximating $1.0
billion, was not recognized as reinsurance because the criteria for risk
transfer were not met for this portion of the transaction. The related
consideration paid was recorded as a deposit and is included in reinsurance
receivables in the Consolidated Balance Sheets. The prospective portion of the
transaction, which as of the transaction date consisted primarily of the cession
of $1.1 billion of unearned premium reserves, has been recorded as reinsurance.
The related consideration paid was recorded as prepaid reinsurance premiums.
Premiums ceded after the transaction date follow this same treatment.

CNA recognized an after-tax realized loss of approximately $39 million in 1999
related to the transaction, consisting primarily of the accrual of lease
obligations and the write-down of assets that related specifically to the
Personal Insurance lines of business. The $120 million ceding commission related
to the prospective portion of the transaction has been recognized in proportion
to the recognition of the unearned premium reserves to which it relates. Ceding
commission earned was $69 million and $51 million in 2000 and 1999. Royalty fees
earned in 2001, 2000 and 1999 were approximately $26 million, $27 million and $7
million.

The Personal Insurance lines transferred to Allstate contributed net earned
premiums of $1,354 million and pretax operating income of $89 million for the
year ended December 31, 1999.



                                      118
<PAGE>

NOTE Q. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables set forth unaudited quarterly financial data for the years
ended December 31, 2001 and 2000.

QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                 FIRST           SECOND            THIRD           FOURTH            YEAR
                                            ---------------- ---------------- ---------------- ---------------- ----------------
(In millions, except per share data)
<S>                                         <C>                  <C>          <C>              <C>              <C>
2001 QUARTERS

Revenues                                     $        3,612            2,734            3,149   $        3,708   $       13,203
                                            ================ ================ ================ ================ ================

Net operating income (loss)
  excluding realized investment gains        $          119   $       (2,075)  $         (155)  $         (290)  $       (2,401)
Net realized investment gains                           237              313                -              268              818
                                            ---------------- ---------------- ---------------- ---------------- ----------------
Net income (loss) before cumulative
  effect of a change in accounting principle            356           (1,762)            (155)             (22)          (1,583)

Cumulative effect of a change in
  accounting principle, net of tax                      (61)               -                -                -              (61)
                                            ---------------- ---------------- ---------------- ---------------- ----------------

NET INCOME (LOSS)                            $          295   $       (1,762)  $         (155)  $          (22)  $       (1,644)
                                            ================ ================ ================ ================ ================

BASIC AND DILUTED EARNINGS (LOSS)
  PER SHARE                                  $         1.61   $        (9.61)  $        (0.84)  $        (0.10)  $        (8.48)
                                            ================ ================ ================ ================ ================

2000 QUARTERS
Revenues                                     $        3,491   $        3,837   $        4,309   $        3,890   $       15,527
                                            ================ ================ ================ ================ ================

Net operating income excluding
  realized investment gains                  $          120   $          154   $          156   $          114   $          544
Net realized investment gains                            21              176              394               79              670
                                            ---------------- ---------------- ---------------- ---------------- ----------------

NET INCOME                                   $          141   $          330   $          550   $          193   $        1,214
                                            ================ ================ ================ ================ ================

BASIC AND DILUTED EARNINGS PER SHARE         $         0.76   $         1.80   $         3.00   $         1.05   $         6.61
                                            ================ ================ ================ ================ ================
</TABLE>



NOTE R.  RELATED PARTY TRANSACTIONS

CNA reimburses Loews, or pays directly, for management fees, travel and related
expenses and expenses of investment facilities and services provided to CNA. The
amounts reimbursed or paid by CNA were approximately $ 18 million, $14 million
and $13 million for the years ended December 31, 2001, 2000 and 1999. In
addition, CNAF and its eligible subsidiaries are included in the consolidated
federal income tax return of Loews and its eligible subsidiaries. See Note E for
a detailed description of the income tax agreement and tax payments made between
the Company and Loews. Also, CNA writes, at standard rates, a limited amount of
insurance for Loews and its affiliates. The total premiums from Loews and its
affiliates were $6 million, $5 million and $5 million for the years ended
December 31, 2001, 2000 and 1999.

CNA assumes the risk for a limited amount of insurance from R.V.I. Guaranty
Company, Inc. (RVI), an affiliate. CNA assumed approximately $2 million, $11
million and $5 million in written premiums from RVI during 2001, 2000 and 1999.

CNA sponsors a stock ownership plan whereby the Company finances the purchase of
Company stock by certain executive officers. See Note J for a detailed
discussion of this plan.



                                      119
<PAGE>

CCC provided an excess of loss reinsurance contract to the insurance
subsidiaries of CNA Surety Corporation (Surety), a 64% owned and consolidated
subsidiary of CNA, over a three year period that expired on December 31, 2000
(the stop loss contract.) The stop loss contract limits the net loss ratios for
Surety with respect to certain accounts and lines of insurance business. In the
event that Surety's accident year net loss ratio exceeds 24% for 1997 through
2000 (the contractual loss ratio), the stop loss contract requires CCC to pay
amounts equal to the amount, if any, by which their actual accident year net
loss ratio exceeds the contractual loss ratio multiplied by the applicable net
earned premiums. The minority shareholders of CNA Surety do not share in any
losses that apply to this contract. Reinsurance balances payable under this stop
loss contract amounted were approximately $22 million and $6 million as of
December 31, 2001 and 2000.










                                      120
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of
CNA Financial Corporation

We have audited the accompanying consolidated balance sheets of CNA Financial
Corporation (an affiliate of Loews Corporation) and subsidiaries, as of December
31, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CNA Financial Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note A to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative instruments and hedging
activities.

Deloitte & Touche LLP
Chicago, Illinois
February 13, 2002


                                      121
<PAGE>



DIRECTORS AND OFFICERS

DIRECTORS
Antoinette Cook Bush (A B C D*)
Executive Vice President
Northpoint Technology Ltd.

Ronald L. Gallatin (A B C D)
Independent Consultant

Walter L. Harris (A B C)
President and Chief Executive Officer
Tanenbaum-Harber Co., Inc.

Bernard L. Hengesbaugh (B C)
Chairman and Chief Executive Officer
CNA insurance companies

Stephen W. Lilienthal (B C)
President and Chief Executive Officer
Property and Casualty Operations
CNA insurance companies

Edward J. Noha (B C)
Chairman of the Board
CNA Financial Corporation

Joseph Rosenberg (B C)
Senior Investment Strategist
Loews Corporation

James S. Tisch (B C*)
President and Chief Executive Officer
Loews Corporation

Laurence A. Tisch (B C)
Chief Executive Officer
CNA Financial Corporation
Co-Chairman of the Board
Loews Corporation

Preston R. Tisch (B C)
Co-Chairman of the Board
Loews Corporation

Marvin Zonis (A*B C D)
Professor of International
Political Economy
University of Chicago
Graduate School of Business


                                      122
<PAGE>

Committees of the Board
A Audit
B Executive
C Finance
D Incentive Compensation
* Indicates Committee Chairperson

OFFICERS

Laurence A. Tisch
Chief Executive Officer
CNA Financial Corporation

Bernard L. Hengesbaugh
Chairman and Chief Executive Officer
CNA insurance companies

Robert V. Deutsch
Executive Vice President
and Chief Financial Officer
CNA Financial Corporation

Stephen W. Lilienthal
President and Chief Executive Officer
Property and Casualty Operations
CNA insurance companies

Debra L. McClenahan
President and Chief Executive Officer
CNA Re
CNA insurance companies

Robert W. Patin
President and Chief Executive Officer
CNA Life and Group Operations
CNA insurance companies





                                      123
<PAGE>
COMPANY INFORMATION

HEADQUARTERS

CNA Financial Corporation, CNA Plaza, 333 South Wabash Avenue, Chicago, IL
60685.


312-822-5000


www.cna.com


STOCKHOLDER INFORMATION

CNA's common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange and the Pacific Exchange, and is traded on the Philadelphia Stock
Exchange. Its trading symbol is CNA.


SHARES OUTSTANDING

As of March 1, 2002, CNA had 223,596,861 shares of common stock outstanding.
Approximately 89% of CNA's outstanding common stock is owned by Loews
Corporation. CNA had 2,473 stockholders of record as of March 1, 2002.


COMMON STOCK INFORMATION

The table below shows the high and low closing sales prices for CNA's common
stock based on the New York Stock Exchange Composite Transactions. No dividends
have been paid on CNA's common stock in order to develop and maintain a strong
surplus position necessary to support business growth in an increasingly
competitive environment for CNA's insurance subsidiaries. CNA's ability to pay
dividends is influenced, in part, by dividend restrictions of its principal
operating insurance subsidiaries as described in Note K to the Consolidated
Financial Statements.

COMMON STOCK INFORMATION


<TABLE>
<CAPTION>
                                                                 2001                    2000
                                                         --------------------- -----------------------
Quarter                                                      HIGH       LOW         HIGH        LOW
                                                         ----------  ---------   ---------   ---------
<S>                                                      <C>          <C>          <C>        <C>
Fourth                                                   $ 29.19      $ 24.81      $40.06    $32.06
Third                                                      39.69        23.00       41.94     34.38
Second                                                     40.25        33.81       36.94     27.13
First                                                      39.19        32.13       39.13     24.56
</TABLE>

ANNUAL MEETING

The Annual Meeting of Stockholders will be held at 10:00 a.m. Chicago time on
May 8, 2002, in Room 207N, CNA Plaza, 333 South Wabash Avenue, Chicago.
Shareholders unable to attend are requested to exercise their right to vote by
proxy. Proxy materials will be mailed to shareholders prior to the meeting.

                                      124
<PAGE>

FORM 10-K

A copy of CNA Financial Corporation's annual report on Form 10-K, which is filed
with the Securities and Exchange Commission, will be furnished to shareholders
without charge upon written request to: Jonathan D. Kantor, Executive Vice
President, General Counsel and Secretary. CNA Financial Corporation, CNA Plaza,
43 South, Chicago, IL 60685


INDEPENDENT AUDITORS

Deloitte & Touche LLP, 180 North Stetson Avenue, Chicago, IL 60601


INVESTOR RELATIONS

Donald P. Lofe, Jr., Group Vice President, Corporate Finance, CNA Financial
Corporation, CNA Plaza, 22 South, Chicago, IL 60685. 312-822-3993


TRANSFER AGENT AND REGISTER

EquiServe Trust Company, N.A., P.O. Box 9187, Canton, MA 02021


Telephone, Inside the United States, 1-800-446-2617. Outside the United States,
1-201-324-0498. TDD/TTY for hearing impaired, 1-201-222-4955. (Operators are
available Monday -- Friday, 9:00 a.m. to 5:00 p.m. Eastern time. An interactive
automated system is available around the clock every day.)


Internet, www.equiserve.com


CERTIFICATE TRANSFERS BY MAIL, PRIVATE COURIER OR MESSENGER

EquiServe, c/o Securities Transfer and Reporting Service, Inc., 100 Williams
Street, New York, NY 10038





                                      125